QAR, ISQM, and BIR’s RUN AFTER FAKE TRANSACTIONS (RAFT) Campaign: A Recall of Quality Audits = Playing a Sustainable Future

The public has a high regard for accountants. In this profession, the public and the stakeholders look up to and show respect for accountants for making a difference in terms of handling business operations, management, financial matters, consultancy, advisory, and compliance services which in the end results in wise business decision making. We are in awe when the Bureau of Internal Revenue in the Philippines started its new campaign regarding the collection of taxes that should otherwise accrue to the government revenue. This BIR’s campaign is considered a bit scandalous and alarmingly affecting the public practice and we do not need to be mum on it, to say at least: Why were the professional title (as a CPA) and accreditation (as Tax Practitioners) included in the campaign?

What is RAFT, the BIR Newest Campaign?

BIR’s recent campaign RUN AFTER FAKE TRANSACTIONS (abbrev. “RAFT”; RMC No. 38-2023) is to investigate and prosecute businesses across the country who are using fake invoices and receipts. Using fake invoices and receipts lowers the taxable income, decreasing the tax due and collection of revenue of the government. Run After Tax Evaders (RATE), Tax Mapping, the Oplan Kandado Program, and other government-enforced tax collecting schemes are not new. However, this RAFT program is the first in history to look for CPAs and tax practitioners who accept or allow their clients’ tax evasion despite knowing such facts. Being said, this campaign also suspends or cancels the certificate of accreditation of Tax Practitioners and initiates administrative complaints for the suspension and revocation of professional licenses of CPAs involved in fake transactions. From the perspective of the CPA and Tax Practitioners, this is a significant accusation. Are the services offered by CPAs and tax practitioners going beyond the tax laws and standards, or is it a symptom of unethical behaviors and unrefreshed memories of discontinued professional development? For the determination of such facts, we leave it to the BIR’s judgment.

The Bottom Line: QAR AND ISQM Implementation

What does BIR point out in this campaign? They are waging war against CPAs and tax practitioners who are involved in such unethical behaviors. Does it affect public practice? Absolutely yes! External auditors who issue an unmodified (clean) opinion to the Financial Statements is bound by such obligations under the Philippine Standards on Audit (PAS). For example, if the auditor concludes that the identified or suspected non-compliance either to law or regulations has a material effect on the financial statements and has not been adequately reflected in the financial statements, the auditor shall, in accordance with PSA 705 (Revised), express a qualified opinion or an adverse opinion on the financial statements. (Ref: PSA 250)

This comes into light the importance of QAR Inspection related to ISQM Implementation on which the CPAs in public practice must have a system of quality management that deals with a firm’s responsibilities to design, implement and operate a system of quality management for audits or reviews of financial statements, or other assurance or related services engagements. QAR is like a doctor’s prescription, giving you a proper dosage of ISQM implementation to enhance or improve the quality of assurance services like audit and tax advisory provided.

QAR AND ISQM, a heyday in quality audits

CPAs in public practice, their commitment to providing quality assurance services like an audit of financial statements helps shape the future of every Filipino. QAR and ISQM are something we can use as a weapon to provide a quality audit and safeguard the interest of the firm, our clients, and the public. In addition, compliance with QAR and ISQM minimizes the risks of being under investigation for BIR’s RAFT program. At the end of the day, all the efforts of CPAs towards nation-building will not be put to waste if compliance is made with established standards and principles affecting the practice of the profession. No one wants to be gaslighted in the end by noncompliance with current standards like ISQM, PSA, and Tax Laws on public practice, which in effect, expose a deemed called “CPAs and tax practitioners” to public scrutiny.

BIR is not an enemy; it is an agency tasked to observe the tax laws and our full cooperation through observance of tax laws (proper advice to clients and communicating the risks involved) alongside issuance of proper audit opinion (checking compliance with PAS, ISQM) will be of immense help. A dull and dry future for everyone awaits if we do not take action now. Arm in arm, we stand in confidence and integrity in the name and love of the profession- we contribute to a sustainable future by making it right. No detours, just comply.

By: Garry S. Pagaspas, CPA

In an effort to expand the tax base, enhance tax compliance in the Philippines, and consequently boost tax collection tax mapping or tax compliance verification drive in the Philippines has been instituted as early as 2003. Under these, the assigned revenue officers would make actual visitation of taxpayer’s premises for purposes of tax compliance verification.

For some taxpayers, presence of assigned revenue officers at their premises is an awkward situation especially when it ends up with penalties for non-compliance. At times, they would avoid such inconvenience in a way or another such as closing the day’s operation.

For better appreciation, let us take up the features of tax mapping or tax compliance verification drive in the Philippines as follows:

Mission Orders of revenue officers

A mission order shall be issued by the Regional Director authorizing specific revenue officers to specific area of operation (not necessarily specific taxpayers) at a specific date and time of operation, to sign Taxpayer Information Sheet (TIS) and apprehension slip in the course of tax mapping operation in the Philippines. Taxpayer could verify the revenue officers identification cards for the purpose.

Issuance of reminder letter

At the start of the mapping in the Philippines of a particular taxpayer, a reminder letter shall be issued to all establishments being tax mapped in the Philippines containing the following:

• Enumeration of what every taxpayer/business establishment is required to do:
• A short list of the BIR requirements prior to, during, and after operations of a business (closure of business);
• Commonly filed BIR forms and deadlines for their filing and payment of corresponding taxes due thereon.

This would serve as the taxpayer’s guide on what to comply under the tax mapping or tax compliance verification drive.

Coverage of Tax Mapping Philippines

Tax mapping in the Philippines is not a tax assessment or examination within the three-year (3-year) or ten-year (10-year) period whether or not the taxpayer has correctly and timely paid taxes due. It is a mere verification of taxpayer’s compliance with registration and other requirements prior to, during, and after its business operations such as the following:

• Taxpayer’s registration of head office and branches (BIR Form No. 2303) along with related update thereto and posting the same in conspicuous place;
• Payment of annual registration fee (BIR Form No. 0605) and posting the same in conspicuous place;
• Authority to Print receipts and invoices, issuance of such receipts and invoices on every sale of services and goods, and contents of receipts and invoices under the rule on invoicing requirements;
• Registration of cash register machines (CRM), point-of-sale machines (POS), and computerized accounting system (CAS); display of registration notices, and other related requirements;
• Registration of books of accounts in the Philippines to manual and simplified books or BIR approval on loose-leaf books of accounts; and compliance with bookkeeping regulations (Revenue Regulations No. V-1) such as updating of such books of accounts;

As you will note on the above, the revenue officers will not look into the details of the books of accounts in relation to filed returns as to whether or not the taxpayer had fully and timely accounted taxes due.

Tax Mapping Penalties for Violations

The revenue officers would note every violation committed by the taxpayer on the Taxpayer Information Sheet (TIS), issue a Violations Checklist, and explain the violations committed and the basis thereof such as the revenue regulations, circular, or order. If the taxpayer believes that the alleged violation is unjustified by the regulations, then, the taxpayer can explain its side in the process so the revenue officer could consider. The taxpayer will be required to pay related penalties and fines for tax mapping violation in the Philippines within five (5) days from receipt.

Upon failure of the taxpayer to pay the penalties, the BIR will issue a Second Opportunity Notice (SON), then Final Opportunity Notice after five (5) days from SON, and finally, a complaint with the Prosecutor’s Office for such violation.

Apprehension and confiscation of unauthorized items

For using unauthorized items like receipts and invoices, books of accounts, the revenue officers will issue apprehension slip and take possession thereof. For using unauthorized CRM, POS, CAS, the revenue officers will likewise issue apprehension slip, seal the CRP/POS with witnesses and taxpayer on photograph or video, and bring the apprehended CRM/POS to assigned vehicle for delivery to custodian in the Regional Office.

Tax Mapping Sticker

Before leaving the taxpayer, the tax mapping team shall post a tax mapping sticker as proof that the establishment has been tax mapped with the following color codings:

• Yellow – first visit
• Red – second visit
• Green – third visit

Such tax mapping sticker would remain in the taxpayers premises and will indicate the frequency of such tax mapping for the particular taxpayer.

References:

• Revenue Memorandum Order No. 31-2003
• Revenue Memorandum Order No. 9-2006

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**@************er.org.

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By: Tax and Accounting Center Philippines

For quite some time, tax evaders had happily succeeded with their utmost objective to pay least taxes (or none at all) by all means and in varied faces of tax evasion. Name it, they came in various ways such as the following:

• arbitrary non-reporting of income,
• over-declaration of expenses,
• fictitious expenses,
• claiming personal expenses as business expense
• borrowing of invoices and receipts,
• non-filing of returns, and more.

Philippine tax system is on a pay-as-you-file system under voluntary compliance where taxpayers learn for themselves how, what and when to pay taxes. Unfortunately, tax evaders look at it as PAY-AS-YOU-LIKE. Philippines tax system employs a check-and-balance mechanism over the voluntary compliance through the exercise of the power to conduct tax examination of tax returns within certain period (say, 3 years or 10 years), but with the large number of taxpayers, some tax evaders get lucky in not being examined. But the game is not yet over, and their time is soon to come!

Bureau of Internal Revenue (BIR) is doing its best in improving the system that would enforce the tax laws, rules and regulations, and eventually hit hard tax evaders. Here are some of the programs and tactics that are geared towards strict tax compliance in the Philippines, discovering lapses, and track down tax evaders:

Run after tax evaders (RATE) in the Philippines

This is a joint program of the BIR and Department of Justice (DOJ) to investigate, prosecute and convict tax evaders for their criminal and other violations of the Tax Code that the BIR would deemed necessary (e.g. failure to file returns, failure to pay taxes, deliberate under-declaration of income or over-declaration of expense by more than 30%, non-remittance of withholding taxes, keeping more than one books of accounts, making false entries on book, and more). Under this, taxpayers alleged for tax invasion from routine audit examination of returns, confidential information, third-party information, and other sources shall be subjected to a preliminary investigation with the DOJ for determination of a probable cause. BIR on the DOJ resolution of probable cause, the tax evader will then be criminally charged before the regular courts. Finding the tax evader guilty may put them behind bars. As of this writing, the Philippine tax authorities had already filed more than hundreds of tax evasion cases and counting.

Oplan Kandado Program in the Philippines

This program started last January 2009 under Revenue Memorandum Order No. 3-2009 intended to punish erring taxpayers by temporarily shutting down business operations of taxpayers based on specific grounds such as the following:

• failure to issue VAT receipt/invoice,
• failure to file VAT return,
• understatement of VATable sales by 30% or more, or
• failure to register

A closure order shall be issued by the BIR and will be lifted only upon compliance as prescribed in the order (e.g. filing and payment of amended VAT return, registration and payment of compromise penalties, and payment of deficiency taxes with penalties).

Tax Compliance Verification Drive in Philippines

This is commonly known to many as “tax mapping” where BIR officers in the Philippines visits business establishments of taxpayers to verify compliance of taxpayers with registration, invoicing, and bookkeeping requirements under existing tax laws, rules, and regulations.  This is not in itself a detailed examination but a simple verification of minor tax compliance with administrative regulations. Each violation carries an amount of penalty and violators may end up paying a lot based on the number of violations. Failure to comply may force the Philippine tax authority to use courts to impose civil and/or criminal liabilities of taxpayers.

 Benchmarking in the Philippines

Benchmarking was implemented through Revenue Memorandum Order No. 4-2006. Under this, the BIR develops industry benchmarks based on the relationships of tax payments and gross sales declared on tax returns using its internal database for the purpose. This industry benchmarks shall be used as reference in determining the extent of compliance of specific industry members and taxpayers within the industry are ranked as follows:

• Low risk
• Medium risk
• High risk

Taxpayer-members of the industry with compliance percentage far from the industry percentage or high-risk will be required to explain its side through a formal letter the BIR will send them. Based on the evaluation of taxpayer’s explanation and other circumstance, Philippine tax authority may conduct tax assessment in the Philippines to further verify the details of its tax compliance. Notably, benchmarking in the Philippines is not in itself a tax audit in the Philippines but only a means that may lead to tax assessment in the Philippines.

Taxpayers Reconciliation System (TRS) in Philippines

Another way for the BIR to get caught tax evaders is through the use of tax returns , reports and attachments filed with them, and third-party information such as importation details from the Bureau of Customs (BoC). Here are some samples on how tax reconciliation in the Philippines works:

Monthly Alphalist of Payees (MAP) attached to the monthly expanded withholding tax return or BIR Form No. 1601-E which identifies taxpayers paid and withheld by the filer where failure of the payee to declare the income in his income tax return may put him in trouble for under-declaration of income.

Another is the reciprocal report on VAT under Revenue Regulations No. 16-2005, as amended, the summary list of sales for VAT seller and the summary list of purchases/summary list of importation of VAT buyer where failure of one to declare would trouble him because the BIR will use the summary provided by the other party. In importations, unrecorded or under-declared importation value for BoC purpose that does not tie-up with summary list of importations may trigger BIR tax examination for alleged under-declaration.

Transfer pricing in the Philippines

Under Revenue Regulations No. 2-2013 prescribing guidelines for transfer pricing, associated companies must transfer goods or services by and between among them at arm’s length transactions so that it will reveal the true amount of taxable income.  Material deviation from the arm’s length nature may entail tax examination. This would cover taxpayers who would mobilize goods or services from among its group of related companies to minimize the impact of taxation on the inter-company sales of good or services.

Summary

There are a lot more ways how BIR could get caught tax evaders in the Philippines and perhaps only time will tell and BIR will have them all, if not most. We commend BIR for its efforts in improving the tax system towards tax compliance and we would expect more improvements on the system and as such, strict tax compliance is much of an urgent need for taxpayers in the Philippines. Tax savings is a best set objective but achieving the same must be put in proper perspective and in accord with tax laws, rules and regulations in the Philippines. Tax compliance may prove to be a good tool towards tax savings because payments for unnecessary penalties will just be a waste of your hard earned business income. Taxpayers are advised to learn what, how, and when to comply.

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**@************er.org, or you may post a question at Tax and Accounting Center Forum and participate therein.