2012 VAT Audit Program for Large Taxpayers in Philippines

In an effort to enhance  taxpayers’ voluntary compliance of value added tax in the Philippines and prescribe certain audit of VAT returns of large value added taxpayers 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 large taxpayers under Revenue Memorandum Order No. 19-2012 dated July 31 2012 (RMO No. 19-2012).

Under RMO No. 19-2012, one (1) e-Letter of Authority (eLA) duly approved  by the ACIR, LTS upon the  recommendation of the VAT Audit Team Heads shall be issued for each taxable  quarter or semester. If a taxpayer has already been issued an eLA for all internal revenue tax liabilities for a particular period and a significant finding/s on VAT was uncovered, it should be communicated to the VAT Audit Team for possible risk identification in the current period under audit. If an eLA has already been issued under the VAT Audit Program and the taxpayer becomes a candidate for regular audit in the concerned division based on the selection criteria under the annual  audit program, the request for eLA should not include the VAT liability of the taxpayer.

RMO No. 19-2012 shall cover the audit/investigation of VAT returns in the Philippines of  LTS taxpayers classified under the following selection criteria:

A. High Risk Taxpayers

1. Factors/Risk Characteristics  resulting to under-reporting of VAT liabilities and non-remittance of VAT collection.

  • Taxpayers  with significant  increase in  exempt/zero-rated sales/revenues
  • Taxpayers whose VAT returns reflect substantial input taxes such as when the total input taxes claimed exceed 75% of the total output tax
  • Taxpayers with history of declaring excess input tax carry over
  • Taxpayers filing VAT exempt tax returns due to availment of tax incentives or tax exemptions
  • Taxpayers with history of filing claim for refund and/or request for issuance  of Tax Credit Certificate (TCC)
  • Taxpayers  with substantial sales but reporting net loss
  • Taxpayers with  drastic decrease in reported sales/VAT payments  or with marked deviation  from industry trends and
  • Taxpayers identified as High Risk based on the result of the LTS Compliance Risk Matrix analysis

2. Compliance Risk Characteristics  due to non-compliance to administrative requirements.

  • Taxpayers with acquisition of more than one (1) million in capital assets and failed to amortize the input tax as required
  • Taxpayers who are non-compliant in the submission of SLP and SLS, MAP, SAWT and other mandatory requirements
  • Taxpayers who are non-compliant with RMO No. 12-2012 – the Electronic Sales Reporting and
  • Taxpayers transacting with the government or any of its political subdivisions, instrumentalities or agencies, including government owned or controlled corporation  (GOCC)

B. Medium Risk Taxpayers – Business Issue Risks/Complex Industries due to industry issues and changes in the status/registration of business.

  • Taxpayers with  complex corporate  structures, including mergers/ consolidations/ split-up or down/ spin-offs and other types of corporate reorganizations
  • Taxpayers with application for cessation/retirement of business
  • Taxpayers with  multiple branches/outlets all over the  Philippines but reported low sales
  • Taxpayers with sale or transfer of business. and
  • Taxpayers with multiple lines of business with different basis for computation of VAT liabilities (e.g. sale of services – VAT is computed on gross receipts, sale of goods where VAT is based on gross sales, etc.)

All audit reports shall be approved by the ACIR, LTS  thru the concerned VAT Audit Team Head. The basic audit procedures prescribed in Revenue Audit Memorandum Order (RAMO) No. 1-99  and other issuances particularly those with impact on VAT audit shall be strictly observed in the conduct of the 2012 VAT audit program in the Philippines. The issuance of Preliminary Assessment Notice (PAN) and Final Assessment Notice (FAN)  for deficiency VAT liabilities as a result of the audit  will be in accordance with existing regulations/issuances.

Based on the findings of the VAT audit team, the taxpayer may pay or file a protest to the alleged deficiency VAT liabilities. If the   taxpayer   fails   to settle or pay   the VAT assessment or fails to file a protest within the prescribed period from receipt of the PAN, the VAT Audit Taskforce shall recommend the issuance and prepare the Final Assessment Notice (FAN) to be  approved and signed by the ACIR, LTS.

This would seem to be a more aggressive approach of the BIR to impose mandatory tax compliance of value added tax rules in the Philippines applicable to large taxpayers. We would recommend large taxpayers to be keen on compliance, update themselves on the implications of the VAT rules applicable to their operations. Alternatively, they could attend seminars and workshops on value added tax in the Philippines and learn from the experts.

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 info@taxacctgcenter.org.

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