Updated Value-Added Tax (VAT) Audit Manual

October 15, 2021 REVENUE AUDIT MEMORANDUM ORDER NO. 1-2022 SUBJECT : Updated Value-Added Tax (VAT) Audit Manual TO : All Internal Revenue Officers and Others Concerned I. BACKGROUND The audit of a tax return is a tool utilized by the Bureau to determine the degree of taxpayer's compliance with existing laws, rules and regulations pursuant to Section 6 of the National Internal Revenue Code (NIRC), as amended by Republic Act (RA) No. 10963 or the "Tax Reform for Acceleration and Inclusion (TRAIN)." By conducting a quality audit of taxpayers' books of accounts and other financial records in sufficient depth, the correctness and validity of entries therein and the propriety of taxpayers' application of tax laws, rules and regulations can be ascertained. II. OBJECTIVES This Order is issued to provide Revenue Officers (ROs) and officials with an updated Value-Added Tax (VAT) Manual (Annex A) which contains basic procedures and techniques in the conduct of audit of VAT liabilities, as well as the minimum documentary requirements that shall be attached by the RO on his audit report. III. REPEALING CLAUSE All other revenue issuances inconsistent herewith are hereby modified or repealed accordingly. IV. EFFECTIVITY This Order shall take effect immediately. (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue ANNEX A Updated Value-Added Tax (VAT) Audit Manual I. INTRODUCTION The updated Value-Added Tax (VAT) Audit Manual has been prepared for all Revenue Officers (ROs) who conduct field examination of VAT returns to ensure the performance of a quality audit. The manual aims to equip the users with the necessary knowledge, relevant auditing skills and confidence in the conduct of the audit so that the examination of internal revenue tax returns, particularly VAT returns, can be competently undertaken. The Manual contains updated basic auditing procedures and techniques in the examination of the taxpayers' VAT liabilities. This manual does not include the policies, procedures and verification of claims for VAT credit/refund which are provided in a separate revenue issuance. The RO is advised to focus on risk areas where there are potential findings of deficiency taxes arising from imposition of output tax on taxable sales and transactions, as well as disallowance of input taxes. However, he is not precluded from performing such other auditing procedures and techniques deemed necessary based on the circumstances prevailing in each particular case. II. AUDIT OF VALUE-ADDED TAX LIABILITIES A. Preliminary Approach to Investigation Prior to actual field investigation, the RO should: 1. Accomplish the General VAT Audit Plan per Annex A-1 through verification of some of the required information from the Bureau's information system, such as the following: a. Number of branches and facilities with corresponding locations; b. Tax types duly registered for the branches and facilities; c. Registered books of accounts for the principal office and branches; d. The issued Authority to Print (ATP) for accountable forms required for principal invoices/official receipts and for supplementary commercial documents including provisional receipts, acknowledgment receipts, delivery receipts, debit memos and credit memos, etc.; e. Permit to use loose-leaf invoices/receipts/books of accounts; f. Approved Computerized Accounting System (CAS) and Computerized Books of Accounts (CBA) or components thereof or Acknowledgement Certificate (AC); and g. Any Letter of Authority/Tax Verification Notice issued to the taxpayer for the audit of his/its VAT liability or all internal revenue tax liabilities covering the same period. 2. Perform analytical procedures based on the tax and information returns including financial statements filed in the Bureau, research through the Internet and/or through other external sources. 3. Familiarize with the business of the taxpayer and determine the economic activity in which he/it is engaged in, whether sale of goods, properties, services and other lines of business aside from the principal undertaking, based on the VAT returns, financial statements, as well as through other sources within the Bureau and through on-line facilities. Refer to the available audit manual for the conduct of audit applicable to the taxpayer's industry, in order to determine the necessary documents that shall be asked from the auditee. 4. Verify the following from the Bureau's information system: a. Filed Returns and Payments per Tax Type; b. Third Party Information provided by the Audit Information, Tax Exemptions and Incentives Division (AITEID) of the National Office; c. eSales and eACCREG reports; d. Electronic data submitted by taxpayers Summary List of Sales (SLS), Summary List of Purchases (SLP), Summary List of Importation (SLI), Monthly Alphalist (MAP), Summary Alphalist of Withholding Tax (SAWT); e. Regulations, Circulars and Rulings including Decisions of the Supreme Court and Court of Tax Appeals; and f. Details of Authority to Print (ATP) or Computerized Accounting System (CAS)/POS Permits issued and registered books of accounts. 5. Study the accounting methods and peculiarities in the industry group where the taxpayer belongs. 6. Analyze the financial statements and notes to financial statements to determine the accounting method of sales and income recognition, accounting period, input tax existence in the asset account, sources of input taxes, related-party transactions including due to/from accounts and other relevant information. 7. Examine the quarterly VAT returns and monthly VAT declarations filed. a. Verify if all the required information is completely and properly reflected therein. b. Check the mathematical accuracy of the computations presented. c. Determine whether the declaration/return was filed and the appropriate tax due was paid at the time required by law or rules and regulations. d. Ascertain if a Tax Debit Memo (TDM) has been issued by the appropriate office authorizing the application of Tax Credit Certificate (TCC) against VAT liability, if applicable. 8. Verify VAT payments through the BIR's Information System and in case the payments are not posted in the taxpayer's ledger, verify the payments from the Batch Control Sheet (BCS) and other manual records maintained by the investigating office. If the VAT returns in the BCS has attached proof of payment, e.g. , bank deposit slip, debit memo or any proof of payment issued by the Authorized Agent Bank/Revenue Collection Officer), verify the reason why the payments were not posted. Take note of the discrepancy in amounts between what was posted in the BIR's Information System and the attached proof of payment, or between the details of payment shown in the VAT returns as against the bank validation. This discrepancy must be further verified during audit proper. 9. Refer to the report of the audit of the VAT liabilities of the taxpayer for the immediately preceding period to be aware of the deficiencies noted that may also be relevant in the audit of the current period, if there is any. 10. Compare the sales and purchases with their corresponding output and input taxes declared against the industry's benchmark under the benchmarking program pursuant to RMO No. 5-2012, if applicable. 11. Recapitulate and tally the entries in the VAT returns filed during the period covered by the investigation to determine the aggregate sales and purchases, output and input taxes. Ascertain whether the ending balances of excess input tax from the preceding period was properly carried-over to the current period (the covered period of audit) and the ending balance of the current period was carried over to the succeeding. 12. Identify significant changes in sales and purchases and VAT payments during the period under audit as compared to the immediately preceding period. Take note of unusual fluctuations in the quarterly sales and/or purchases. 13. Prepare checklist of documentary requirements to be attached to the electronic Letter of Authority (eLA), as well as the books of accounts and accounting records to be examined per Annex A-2 hereof. B. General Approach to Field Investigation 1. Serve to the taxpayer the original copy of the eLA, together with the checklist of requirements. Observe and strictly comply with the proper service of eLA prescribed in item number 23 of RMO No. 19-2015 and clarified in Revenue Memorandum Circular (RMC) No. 110-2020. 2. Request for the books of accounts and other relevant accounting records, as necessary, to determine proper recording and recognition of sales and output tax, purchases and expenses with input tax, and other transactions that could give rise to VAT liabilities. 3. Conduct ocular inspection of the taxpayer's premises such as production plant, sales outlets and/or storage facilities. Relate the equipment in use, the product lines being carried, and the estimated value of the business being handled with the amount of sales declared in the VAT returns. Observe the movement of transactions based on cash inflows and outflows as this could not be manifested in the capital investment. 4. Conduct interview with responsible and authorized finance, accounting, sales and other personnel to further familiarize with business operations related to sales and purchases. C. Audit of Sales and Output Tax 1. Sales of Goods, Properties, and Services In General a. Compare each category and amount of sales per monthly VAT declarations, quarterly VAT returns, SLS and audited financial statements with the classification and amount of sales per general ledger and sales journal. b. Review the composition of the sales account in the journals and ledgers and ascertain that: b.1. Only those transactions which are specifically exempted under Sec. 109 of the National Internal Revenue Code of 1997 (Tax Code), as amended and further amended by "Corporate Recovery and Tax Incentives for Enterprises Act" (CREATE) as implemented under Revenue Regulations (RR) No. 4-2021, are treated as exempt sales. b.2. "Deemed" sales of goods as mentioned under Section 106 (B) of the Tax Code, as amended, are recorded as taxable transactions, to wit: b.2.1. Transfer, use or consumption not in the course of business of goods, properties or services originally intended for sale or for use in the course of business. Transfer of goods, properties or services not in the course of business can take place when a VAT-registered person withdraws goods or avail of services from the business and intended for other use or purposes; b.2.2. Distribution or transfer to shareholders or investors as share in the profits of the VAT-registered person or to creditors in payment of debt or obligation; b.2.3. Consignment of goods if actual sale is not made within 60 days following the date when such goods were consigned. (Consigned goods returned by the consignee within the 60-day period are not deemed sold). If there is any "Consignment Agreement," check the agreed terms; and b.2.4. Retirement from or cessation of business or death of an individual with respect to inventories of taxable goods existing as of such retirement or cessation. The following circumstances shall, among others, give rise to transactions "deemed sale." i. Change of ownership of the business There is a change in the ownership of the business when a single proprietorship incorporates or the proprietor of a single proprietorship sells his entire business; ii. Dissolution of a partnership other than a general professional partnership and creation of a new partnership which takes over the business; and iii. Death of an individual who is a VAT-registered person when the heirs of the decedent shall continue to operate the business. b.3. Goods or properties originally intended for sale or use in business and capital goods which are existing as of the occurrence of the following, are subject to output tax under Section 106 (C) of the Tax Code, as amended: b.3.1. Change of business activity from VAT-taxable status to VAT-exempt status; b.3.2. Approval of a request for cancellation of registration due to reversion to exempt status; b.3.3. Approval of a request for change from VAT to non-VAT status in the registration due to a desire to revert to exempt status after the lapse of 3 years from the time of registration by a person who voluntarily registered despite being exempt under Section 109 of the Tax Code, as amended; and b.3.4. Approval of a request for change from VAT to non-VAT status in the registration of one who commenced business with the expectation of gross sales or receipts exceeding P3,000,000.00 but failed to exceed this amount during the first twelve months of operation. Hence, taxpayers are required to file the quarterly VAT return covering the period when the change of status transpired and pay the corresponding VAT due on inventories including capital goods disposed of or existing thereon, as provided under RMC No. 39-2018. c. Check the accuracy of the details in the schedule/Sales Journal against the sales invoices/official receipts issued for all types of sale and for zero-rated sales of goods and/or services. d. Match the amounts of sales subject to 0% VAT, 12% VAT and VAT-exempt sales per schedule/Sales Journal with those reflected in the VAT returns and SLS. Determine if the amount of output tax reflected has been correctly computed. e. Verify totals of sales subject to 0% VAT, 12% VAT and VAT-exempt sales as a basis for allocation of input taxes not directly identifiable with each category of sales, where applicable. f. Verify if there are any foreign loans or foreign transactions outside the regular course of business that will give rise to assessment of output tax. g. Test the accuracy of the amount in sales account against the total per source documents, e.g. , sales invoices, official receipts, credit and debit memos or delivery receipts. h. Determine compliance with the invoicing requirements and procedures by: h.1. Verifying the validity of the Authority to Print (ATP) of the sales invoices/official receipts or approved Permit to Use Computerized Accounting System issued by the office where the taxpayer is registered; and h.2. Check whether the issued sales invoices/official receipts are in accordance with Section 113 (B) and 237 of the Tax Code, as amended, and RMO No. 12-2013 and RR 16-2018; h.3. Assess penalty for any violation of Section 237 of the Tax Code in relation with Section 113 (B). Impose compromise penalty under RMO No. 7-2015. i. Ensure that all issued principal sales invoices/official receipts and supplementary documents as sources of income are accounted for, including those issued by branches. Take down any break in the sequence of the serial numbers of issued invoices and ask the taxpayer to account for the missing numbers. In case of cancellation, look for the original copy and note in the working papers the cancelled invoices, as well as those which are unaccounted. Determine if the unaccounted invoices pertain to local sales which should be subject to output tax. j. Be alert if the taxpayer is practicing the following schemes and report to the appropriate office for criminal investigation: j.1. use of double or multiple set of invoices/receipts bearing identical serial numbers j.2. unregistered invoices/receipts j.3. non-issuance of official receipts or invoices j.4. invoices/receipts not within the validity period j.5. use of supplemental or provisional invoices without issuing the corresponding principal invoices/receipts j.6. use of unregistered CRMs/POS machine j.7. use of computer-generated/loose-leaf invoices/receipts without the issued BIR permits. k. Verify if the transactions covered by "Statement of Account" Billing Statements, "Delivery Receipt," "Collection Receipts" Purchase Orders', Provisional Receipts', Acknowledgement Receipts, Job Orders Debit/Credit Notes" and other similar documents issued to their customers has corresponding principal invoices/official receipts and as recorded as sales. These supplemental documents should include the phase "THIS DOCUMENT IS NOT VALID FOR CLAIM OF INPUT TAX" on bold letters and shall be conspicuously printed at the face of the said document per RMO 12-2013. The mere issuance of these documents without the corresponding sales invoice is a violation of the bookkeeping regulations and an indication of unrecorded sales. l. When verifying a delivery receipt, ascertain whether it covers a consummated sale or consigned sale. Consignment should be duly supported by a contract between the consignor and the consignee. m. If the taxpayer is engaged in mixed transactions (subject to VAT, zero rated and exempt), the invoice or receipt shall clearly indicate the breakdown of the VAT sale with VAT amount, zero-rated sales and exempt sales component. Any person whose sale of goods, properties or services which are otherwise not subject to VAT but who issues a VAT invoice or receipt therefore shall, in addition to his liability to percentage tax, if any, and applicable penalties, be liable to VAT without benefit of any input tax credit pursuant to Section 4.113-4 of RR No. 16-2005, as amended by RR No. 13-2018. n. Verify sales contracts, marketing agreements, consignment terms and other sales related documents for possible under-declaration. o. Scrutinize miscellaneous and other income accounts and due to/from accounts to ascertain if such accounts are subject to VAT. p. Examine the cash receipts per book and official receipts and other supplementary receipts issued to uncover any collection which may not have been included in the taxable sale. q. Be resourceful in discovering under-declaration of sales by evaluating abnormal levels of inventories, sales, purchases, accounts receivables, including manipulation of inter-branch transactions, among others, which may suggest instances of under-declaration. r. Validate findings/discrepancies noted by examining details of transactions reflected in the books of accounts against certifications of purchases from selected buyers with Discrepancy Notices generated from the matching of pre-processed data (Summary List of Sales/Summary List of Purchases) against the VAT returns of the taxpayers under audit. s. Reconcile the sales or receipts reported per VAT returns with the amount of sales/receipts subjected to withholding tax reflected in the withholding tax certificate submitted by customers to the BIR, if applicable. Match and reconcile the creditable taxes availed appearing in the annual income tax returns. t. Scrutinize the reasonableness of the level of inventory vis--vis the sales reported in the VAT returns, income tax return and financial statements. u. Analyze all the accounts and entries affecting total sales, particularly cash accounts, accounts and/or notes receivable, collections from receivables, sales discounts and sales returns, bad debts written off and other relevant accounts. Apply the pro-forma computation to arrive at the total sale of goods in Annexes A-3 to A-5, where applicable. v. In auditing sale of services, analyze other accounts such as advances, retention receivables, mobilization fees and other related accounts. [See pro-forma computations on Annex A-6.] w. Identify instances where the gross selling price of goods or properties are being unreasonably lower than the actual market value, then evaluate if there are instances of schemes for transfer pricing and make the necessary adjustments in the sales value thereof, where applicable. For sale of real properties, the taxable base for the imposition of VAT is the gross selling price or fair market value whichever is higher pursuant to the provision if Section 4.106-4 or Revenue Regulations No. 16-2005. x. If the accounting records are unreliable, the following may be performed: x.1. Look into gate passes, delivery receipts, sales order slips, purchase order registers and other records used by the taxpayer in his/its day-to-day transactions. x.2. In the absence of pre-processed data on Summary of Sales and Purchases in the National Office, request for a certification from its major customers and suppliers as to their purchases and sales, respectively, to the taxpayer. x.3. Consider a covert or overt surveillance as required by the circumstances, if applicable. y. If the selling price is unreasonably lower than the actual market value, identify if there are instances of schemes of transfer pricing. z. Account for deductions from sales such as: z.1 Section 106 D of the Tax Code clearly states the conditions for a discount to be a valid VAT deduction, namely: i. Discount is indicated in the invoice/receipt at the time of sale, ii. Discount does not depend upon the happening of a future event, and iii. Discount is granted within the same quarter it was given. z.2 Sales returns and allowances for which proper credit or refund was made during the month or quarter to the buyer for sales previously recorded as taxable sales. aa. For audit of real estate developers, compare the following information required under RMC 57-2014 and with information stated in the tax returns: aa.1 Annex B Inventory of Saleable Units with Corresponding Cost per Project. aa.2 Annex B-1 Schedule of Inventory of Saleable Units per Project the Corresponding Trade Accounts Receivable Reconciliation. bb. For audit of insurance companies, secure a copy of the Insurance Commission (IC) Report required under RR 21-02 and compare information stated therein with the tax returns. 2. Zero-Rated Sales of Goods and Services a. Determine whether sales declared as zero-rated actually emanate from export sales and other transactions that may qualify as zero-rated in accordance with Section 106 (2) of the Tax Code, as amended, in relation to RR No. 16-2005, as amended by RR Nos. 4-2007 and 13-2018. b. For actual export sales of goods, obtain schedule/Sales Journal with the following information and vouch supporting documents: b.1. Date of Export b.2. Sales Invoice Number b.3. Name of Customer/Buyer b.4. Airway Bill/Bill of Lading No. b.5. Shipment Date b.6. Amount of Sales in Foreign Currency and in Pesos b.7. Amount of Foreign Currency Remitted b.8. Conversion Rate b.9. Amount of Remittance in Pesos b.10. Date of Remittance b.11. Accredited Bank b.12. Bank Credit Memo Number/Documentary Proof of Remittance b.13. Discrepancy between Amount of Sales in Foreign Currency per Sales Invoice and Amount of Remittance in Foreign Currency b.14. Forex Gain or Loss b.15. Remarks c. For zero-rated sale of services, obtain schedule with the following information: c.1. Date of Transaction c.2. Official Receipt (OR) Number and Date of OR c.3. Name of Customer/Contractee c.4. Amount of Sales in Foreign Currency c.5. Amount of Foreign Currency Remitted c.6. Conversion Rate c.7. Amount of Remittance in Pesos c.8. Date of Remittance c.9. Accredited Bank c.10. Proof of Remittances (Bank Credit Memo, etc.) c.11. Discrepancy Between Amount of Sales in Foreign Currency per Official Receipts and Amount of Remittance in Foreign Currency c.12. Forex Gain or Loss c.13. Remarks d. Review commercial invoices/receipts, bills of lading or airway bills, export declaration permit, packing lists, inward letters of credit, landing certificates and other related commercial documents and match with the sales invoices issued. e. Examine service contracts, job orders and related documents for zero-rated sales of services and determine if the implementation and execution of services are outside the Philippines, which will qualify as zero rated sales. f. Ascertain if the proceeds from zero-rated sales were paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP) by verifying the supporting bank credit memo, bank certifications, taxpayers' passbook or any document issued by the bank to prove the inward remittance of foreign currency from the zero-rated sales. g. In case of constructive remittance such as offsetting arrangement, secure copy of the following: g.1. Board resolution as to offsetting arrangement; g.2. Memorandum of agreement containing terms of payment; g.3. Intercompany debit or credit memo or any document on the amount constructively remitted under the offsetting arrangement; and/or g.4. Other loan documents or proofs of company advances. If the amount of inward remittance on the constructive remittance is less than the total zero-rated sales, the discrepancy shall be construed as unremitted export sales. Hence, the input tax pertaining to the discrepancy shall be deducted from the allowable input tax (net of disallowances) using the following formula: For Companies with Purely Zero-Rated Sales Unremitted Export Sales X Allowable Input Tax = Input Tax Allocable to Unremitted/Unaccounted Export Sales Total Zero-rated Sales For Companies with Mixed Transactions Unremitted Export Sales X Allowable Input Tax = Input Tax Allocable to Unremitted/Unaccounted Export Sales Total Sales (Zero-rated + Taxable + Exempt) Computation of allowable input tax: Total available input tax per returns Pxxx Less: Disallowed input tax per audit xxx Allowable input tax per audit Pxxx ===== h. For effectively zero rated transactions, secure copy of duly approved application for zero rating. Without an approved application, the transaction otherwise entitled to zero-rating shall be considered exempt. Based on the CREATE law under Revenue Regulations 9-2021, 12% VAT is imposed on transactions covered under Sec. 106 (A) (A) (2) (a) subparagraphs 3, 4, 5 & Sec. 108 (B) subparagraphs (1) and (5). Implementation of this regulation is deferred under Revenue Regulations 15-2021. 3. VAT-Exempt Transactions a. Secure a copy of the BIR ruling in relation to the taxpayer's exemption and verify its authenticity from the issuing office. b. Check whether the current line of business of the company matches the main line of business indicated in its Certificate of Registration and Certificate of Exemption. c. Identify if all the transactions can be classified as VAT-exempt as enumerated under Section 109 of the Tax Code, as amended, with particular emphasis on amendments under the TRAIN Law and CREATE Law. d. Ascertain compliance on invoicing requirements for VAT-exempt entities. 4. Related-Party Transactions a. Review the disclosures in the notes to financial statements to determine if there are related-party transactions. b. Analyze movements of inter-related company accounts and verify documents involving related-party transactions to ascertain whether there are transactions that are subject to VAT such as but not limited to transfers of inventories, inter-company billings of services, reimbursements-on-cost basis, royalties, management fees and service fees paid to non-resident foreign affiliates subject to final withholding VAT. c. When auditing inter-related parties with cross-border or inter-related parties under two-tax regime, identify instances where the gross selling price of goods or properties are being unreasonably lower than the actual market value, then evaluate if there are instances of schemes for transfer pricing and make the necessary adjustments in the sales value thereof, where applicable. D. Audit of Purchases and Input Tax 1. Compare the nature and amount of purchases per VAT returns, financial statements and general ledger. Reconcile the amount of each category of purchases per VAT declarations and returns with the amount of purchases per purchase journal. Check if all the information required are recorded likewise in the subsidiary purchase journal. Determine any discrepancy and request for reconciliation of the discrepancy. 2. Obtain Summary of Purchases/Purchase Journal with the following information: a. Date of transaction b. Name of Payee c. TIN of Payee d. Sales Invoice No./Official Receipt No. e. Check number (if applicable) f. Gross taxable purchases g. Exempt purchases h. Zero-rated purchases i. Input tax 3. Check the correctness and completeness of the submitted schedule of purchases through the following procedures: a. Verify the accuracy of the details in the schedule against the suppliers'/sellers' sales invoices, official receipts, deeds of sale and other documents in support of the purchase of goods/properties and services. b. Check the correctness of the input tax shown separately on the sales invoice official/receipt and match with the amount per schedule. c. Analyze and compare the summary of purchases with entries appearing in the subsidiary purchase journals, purchase journal, purchase invoices and other source documents. 4. Ascertain that the recorded amount of the purchase of goods, properties or services are net of VAT. 5. Verify whether the taxpayer filed amended returns or declarations covering the period under audit to preclude any possibility that the audit findings will still include transactions which were already reflected by the taxpayer in the amended returns. 6. Reconcile the amounts of input tax claimed in the VAT return for the portion carried over from previous quarters and the balance carried to succeeding quarters with the amounts recorded in the books of accounts. In case there are discrepancies between these records, trace the sources of discrepancies against underlying documents to detect any possible deficiency tax assessment. 7. Ascertain that input tax credit is not recognized from the following: a. Purchases from non-VAT and/or exempt persons; b. Effectively zero rated purchases; c. Purchases from VAT persons, which are personal in nature or not made in the course of trade or business; and d. Purchases of tax-exempt goods, properties or services from VAT-registered persons although covered by VAT invoices or receipts. 8. Determine compliance with the substantiation requirements for claims of input tax credit. a. For domestic purchases of goods, properties and services in the course of trade or business, these must be supported by VAT invoices and/or official receipts, showing the information required in Secs. 113 (B) and 237 of the Tax Code, as amended. A cash register machine tape shall constitute valid proof of input tax credit only if it shows the information required under the aforementioned issuances, as implemented in Section 4.110.8 (4) of RR No. 16-2005, and Section 2 of RR No. 16-2018. b. Input tax on purchases of real property should be supported by a copy of the public instrument ( i.e. , deed of absolute sale, deed of conditional sale, contract/agreement to sell) together with the VAT invoice and/or official receipt issued by the seller, as implemented in Section 4.110-8 (a) (3) of RR No. 16-2005. 9. For purchase of real property and other items on instalment basis, take note that: a. VAT official receipts issued for amortization (installment) payments, subsequent to initial payments on "Deferred Payment Basis (DPB)," shall not generate input tax credit. Under DPB where initial payment exceeds 25% of the gross selling price, the transaction shall be treated as cash sale which makes the entire selling price taxable in the month of sale. b. In accordance with Section 4.106.3 paragraph 2 of RR No. 16-2005, for sale of real property on installment plan, the computation of VAT shall be based on the installment payments, including interests and other penalties for late payment, actually or constructively received by the seller. 10. Examine supporting documents for input tax on importation, particularly the official receipts issued by the Bureau of Customs (BOC) including the supporting Import Entry and Internal Revenue Declarations (IERD) and/or Single Administrative Document (SAD), Statement of Settlement of Duties and Taxes (SSDT). 11. Verify actual existence of goods or properties that generate input tax credits whenever practicable and ascertain whether the same are actually used in the course of business. 12. Check the correctness of the input tax shown separately on the invoice/receipt. Input tax not separately reflected on the invoice cannot be allowed as a deduction from the corresponding output tax. 13. For purchases of goods, check the subsequent payment of the items purchased and determine if there are discounts granted, returns and allowances. Input tax credit should be reduced by the VAT portion of the said adjustment to the purchase. 14. If a VAT-registered person is also engaged in exempt activities, determine the direct attribution of purchased goods, properties or services to taxable and exempt transactions. If purchases are directly attributable to exempt transactions, any claim for input tax credit thereof shall be disallowed. However, if the input taxes paid for purchases of goods, properties or services could not be directly attributable to either activity, the same shall be allocated between the taxable operation and non-taxable operation using the computation shown in Annex A-7. The amount allocated to the exempt transaction should result to corresponding reduction of input tax credit balance. 15. Verify the authenticity and validity of the input taxes claimed by the taxpayer in his/its VAT returns. Per RMO Nos. 16-2007 and 22-2007, it is not only enough that the taxpayer is able to present, upon audit, the corresponding sales invoices/official receipts to evidence these purchases declared, but there is a further need to ascertain the legitimacy and factual existence of "big-ticket" items of purchases and validate whether these have been appropriately recorded in the books of accounts and reflected in the filed tax returns of both the taxpayer and the seller/supplier of goods/services. For this purpose, "big-ticket" items of purchases shall refer to local purchases made from suppliers whose individual gross annual cumulative sales to the particular taxpayer-purchaser accounts to more than five percent (5%) of said taxpayer-purchaser's annual gross purchases covering the period under audit based on Quarterly VAT returns. Likewise, "big-ticket" items of importation shall refer to those importations of goods by one and the same importer where the aggregate VAT paid thereon to the BOC prior to the release of goods from its custody amounts to One Hundred Thousand Pesos (Php100,000.00) or more per quarter. 16. Check the authenticity and correctness of substantial claims and "big ticket" items of input tax credits through the following procedures: a. Ascertain that the purchases made by the taxpayer for which input taxes have been claimed were likewise appropriately reported as sales by his/its respective suppliers in their corresponding VAT Returns/Income Tax Returns and in the summary lists of sales submitted to the BIR. Analyze the pre-processed data, specifically the Summary List of Sales/Summary List of Purchases and Importations provided by the Audit Information Tax Exemptions and Incentives Division (AITEID) of the National Office, include the utilization in the memorandum report, and present the effect in the Revenue Officer's audit report on VAT (BIR Form 0507). b. In the absence of the Summary List of Sales from the suppliers in the NO, perform the following procedures: b.1. Access the BIR's Information System to determine whether the suppliers are duly registered as VAT taxpayers. If it is found out that the suppliers are not registered, or registered as Non-VAT taxpayers only but issuing VAT invoices, then pertinent information relative to the supplier and sales made to the taxpayer under audit must be endorsed to the Regional Investigation Division of the Regional Office or the National Investigation Division of the NO for tax fraud investigation and other appropriate action. Disallowance of the input taxes attributable to the sales made by these questionable suppliers shall only be done if, aside from the sales invoice or official receipt, no other evidence can be presented by the taxpayer to substantiate the authenticity of other purchases made. b.2. Obtain copies of the VAT returns of the suppliers with "big ticket purchases" by the taxpayer under audit from the appropriate BIR office where the suppliers are registered or from the BIR's Information System covering the taxable period of audit. b.3. For local purchases obtain secondary proofs/evidence to substantiate the authenticity of the purchases such as copies of delivery receipts of the suppliers and check vouchers and paid checks issued by the taxpayer with "big ticket" purchases. For importation, verify any discrepancy in the SLI and BOC data thru the Import Entry and Internal Revenue Declarations and other documents mentioned in item 10 which will be provided the taxpayer. Under RMO No. 22-2007, disallow any irreconcilable discrepancy noted between the declaration of input taxes claimed in the VAT returns and those actually paid to the BOC. Thus, deficiency VAT must be assessed on account thereof. 17. In case of acquisition of capital goods in 2021 and prior years, check if the following rules were applied: a. Where the aggregate acquisition cost (exclusive of VAT) of the existing or finished depreciable capital goods purchased or imported during any calendar month does not exceed one million pesos (P1,000,000), the total input taxes will be allowed as credit against output tax in the month of acquisition. b. Where the aggregate acquisition cost (exclusive of VAT) of the depreciable capital goods in a calendar month exceeds one million pesos (P1,000,000), regardless of the acquisition cost of each capital goods purchased/imported, the input taxes shall be claimed as credit against output tax in the following manner: b.1. If the estimated useful life of a capital goods is five (5) years or more, the input tax shall be spread evenly over a period of sixty (60) months and the claim for input tax credit will commence in the calendar month when the capital asset is acquired. The total input taxes on purchases or importations of this type of capital goods shall be divided by 60 and the quotient will be the amount to be claimed monthly. b.2. If the estimated useful life of a capital goods is less than 5 years, the input tax shall be spread evenly on a monthly basis by dividing the input tax by the actual number of months comprising the estimated useful life of the capital asset. The claim for input tax credit shall commence in the calendar month that the capital assets/goods were acquired. b.3. For the amortized portion of the input VAT on aggregate purchases of capital goods exceeding one million pesos (P1,000,000.00) in a month pursuant to Section 110 (A) (2) of the Tax Code, as amended, the following rules shall apply: b.3.1. For current purchases, the corresponding sales invoices and/or official receipts, including proofs of payment, if qualified as "big ticket" purchase, shall be required to be submitted and verified. b.3.2. An asset acquired on installment for an acquisition of more than one million pesos (P1,000,000.00), excluding the VAT, will be subject to the amortization of input tax despite the fact that the monthly payments/installments may not exceed one million pesos (P1,000,000.00). b.3.3. For the amortized deferred input VAT which originated from purchases prior to the period of claim, the schedule of amortization of deferred input VAT in the approved report of the prior year's audit, if any, will be the basis in determining the amortized portion. If there was no audit in the prior year(s), the RO should verify the proof of the purchase of the capital goods to determine the reckoning date of the amortization. The amortization of input tax on capital goods purchased or imported until December 31, 2021 shall be allowed as scheduled until fully utilized. For purchase of capital goods beginning January 1, 2022, its corresponding input VAT shall be claimed on the month of purchase pursuant to Revenue Regulations No. 13-2018. 18. Determine the allowable input tax on Construction in Progress Construction in progress (CIP) is the cost of construction work which is not yet completed. CIP is not depreciated until the asset is placed in service. Normally, upon completion, a CIP item is reclassified and the reclassified asset is capitalized and depreciated. CIP is considered, for purposes of claiming input tax, as a purchase of service, the value of which shall be determined based on the progress billings. Until such time the construction has been completed, it will not qualify as capital goods as herein defined, in which case, input tax credit on such transaction can be recognized in the month the payment was made, provided, that an official receipt of payment has been issued based on the progress billings. In case of contract for the sale of service where only labor will be supplied by the contractor and the materials will be purchased by the contractee from other suppliers, input tax credit on the labor contracted shall still be recognized on the month the payment was made based on a progress billing while input tax on the purchase of materials shall be recognized at the time the materials were purchased. Once the input tax has already been claimed while the construction is still in progress, no additional input tax can be claimed upon completion of the asset when it has been reclassified as a depreciable capital asset and depreciated. 19. Verify the correctness of the claim for presumptive input tax, if any. a. Ascertain the legal basis for entitlement to the claim for presumptive input tax. b. Check whether the taxpayer has complied with all the administrative requirements relative to the claim pursuant to existing rules and regulations. c. Check the reasonableness of the value of inventories used as a basis in computing the claim for presumptive input tax. Be alert on the possibility that the taxpayer may have deliberately inflated his inventory balance to take advantage of huge presumptive input tax credit or may have included items of inventories that are not entitled to any tax credit. Any record obtained pertinent to the identified supplier of the taxpayer should be considered strictly confidential and shall be used exclusively for internal revenue tax purposes. All employees who in any way made access to the system and manual files should be informed of the legal provisions governing unlawful disclosure of any taxpayer's information. Any divulgence, unless authorized by law, shall be a ground for the imposition of the administrative sanctions and filing of appropriate charges against the erring official and employee. 20. Check income payment made to non-residents if the same are subject to VAT. If subject to VAT, verify if the final VAT withholding tax on rental, royalties, management fees and other taxable services paid to non-residents have been properly withheld and remitted using Form 1600. 21. In case there is a claim for input tax on said transactions, ascertain that same is duly substantiated with contracts and proofs of payments, aside from Form 1600. 22. Verify if the taxpayer over claimed input tax by comparing all possible sources of input tax per audited financial statement and input tax claimed in the current period per VAT return. E. Reporting Requirements The audit report should be brief and concise but complete in all details necessary to its understanding. It must have the following contents but not limited to: 1. Table of Contents 2. Duplicate copy of the electronic Letter of Authority (eLA) 3. General VAT Audit Plan 4. Copies of monthly VAT declarations and VAT quarterly returns for the audit period with proof of payment 5. Copy of Income Tax Return and Audited Financial Statements covering the period under audit 6. Copies of VAT withholding certificates or BIR Form 2307 issued by customers, if applicable 7. Approved application for zero-rate, if applicable 8. Notice of revocation of approved application for zero-rate, if applicable 9. Photocopies of certificate of registration with other government agencies evidencing exemption from VAT, if applicable 10. Proof of actual inward remittance of proceeds of export sales, if applicable 11. Summary List of Sales and Purchases of big-ticket suppliers 12. Copies of official receipts issued by the BOC, import entry declarations, sales invoices, and delivery receipts of the seller, which are considered as "big-ticket" items 13. Utilization of Pre-processed Data (Summary List of Sales/Purchases/Importations) from the Audit Information, Tax Exemption and Incentives Division per Annex A-8 and Annex A-9 14. Worksheets showing the following schedules: a. Schedule of sales and output tax (including all branches) b. Schedule of purchases and input tax (including all branches) c. Reconciliation of Cash account vs. Sales account, with explanations on the reconciling items d. Benchmark Analysis Report (If the sales/VAT payment is below the benchmark for the industry the taxpayer is included, statement of reasons) e. Analysis of relevant account such as cash, receivables, payables, advances, etc. (if applicable); including analysis of issued Sales Invoice/Official Receipts f. Adjustments to sales and output tax (with explanations) g. Adjustments to purchases and input tax (with explanations) h. Computation of deficiency VAT 15. RO's memorandum report stating the nature of business, brief description of the taxpayer's accounting system and thorough discussion of the audit findings and other relevant information uncovered during the investigation and his recommendation thereon refer to Annex A-10 for the list of common VAT audit findings 16. Duly accomplished BIR Form 0507-RO's VAT Audit Report (Annex A-11) 17. Agreement Form, if applicable 18. BIR Form 0605-Payment Form, if applicable, duly validated by the bank where the deficiency tax was paid together with copy of bank deposit slip with machine validation by the accredited bank 19. Copies of Tax Debit Memo (TDMs) and corresponding Tax Credit Certificates or other proofs of payment through payment channels, if applicable 20. Other general and specific requirements, if applicable 21. List of assets of the taxpayer being investigated, such as type of assets, location of the assets, bank accounts maintained, etc. with detailed pertinent information in compliance with the submission of "List of Assets" prescribed under RMO No. 26-2010 22. Waiver of the Statute of Limitation, if applicable (Annex A-11) ANNEX A-1 General VAT Audit Plan ANNEX A-2 Books of Accounts and Other Accounting Records to be Examined I. Books of Accounts 2. n General Ledger a. Subsidiary ledgers for branches, if any 3. General journal/journal vouchers 4. Sales journal a. Subsidiary sales journal for control account b. Subsidiary sales journal for branches, if any 5. Purchase journal a. Subsidiary purchase journals for control account b. Subsidiary purchase journals for branches, if any 6. Cash receipts book 7. Cash disbursements book II. Accountable Forms/Source Documents 1. Sales invoices of head office and branches, if any, for sales of goods 2. Official receipts for sales of services 3. Collection/acknowledgment receipts 4. Purchase invoices 5. Purchase orders 6. Receiving reports 7. Delivery receipts 8. Deeds of Sale, sales contracts or any other similar documents 9. Import entry documents, if applicable 10. Debit/Credit Memo issued by suppliers or customers 11. Production reports for manufacturers III. Other Accounting Records (if necessary) 1. Gate pass 2. Purchase order register 3. Check vouchers 4. Cancelled checks 5. Transfer documents 6. Withdrawal documents (for goods for personal use) 7. Bank Statements 8. Auditor's adjusting entries 9. Auditor's working papers ANNEX A-3 Apply the following pro-forma computation to arrive at the total sale of goods. (All accounts should be net of VAT.) Cash sales (net of VAT) xxxxxxx Add: Collections of accounts receivable xxxx Collections of notes receivable xxxx Sales discounts granted xxxx Sales returns and allowances xxxx Accounts receivable, ending xxxx Notes receivable, ending xxxx Total xxxx Less: Accounts receivable, beginning xxxx Notes receivable, beginning xxxx xxxx Sales on account for the period xxxxxxx Total sales during the period xxxxxxx ====== ANNEX A-4 In appropriate cases, account for the quantity and amount of goods actually sold using the formula as follows: Units of finished goods/merchandise inventory, beginning xxxx Add: Total units of goods manufactured/purchases of merchandise inventory xxxx Total units of goods available for sale xxxx Less: Units of finished goods/merchandise inventory, end xxxx Number of units issued xxxx Less: Samples, destroyed or lost items xxxx Number of units sold during the period xxxx Multiply by average selling price per unit xx Total sales per audit xxxx ==== ANNEX A-5 If the taxpayer is engaged in mixed transactions, determine the taxable sale by computing: Total sales during the period xxxxxx Add: Deemed sales per audit xxxxxx Total sales per audit xxxxxx Less: Zero-rated sales xxxxxxx Exempt Sales xxxxxxx xxxxxx Gross taxable sales xxxxxx Less: Sales returns and allowances xxxxxx Net taxable sales xxxxxx ===== ANNEX A-6 Apply the following pro-forma computation to arrive at the gross taxable receipts during the period: (All accounts should be net of VAT.) Income or billings during the period xxxxx Add: Accounts receivable, beginning xxxx Retention receivable, beginning xxxx xxxx Total amount for collection xxxx Less: Accounts receivable, ending xxxx Retention receivable, ending xxxx xxxx Collections of income and receivables xxxx Add: Deposits, advances and/or mobilization fee xxxx Gross receipts during the period xxxx Less: Gross receipts from exempt service xxxx Gross receipts from zero-rated service xxxx xxxx Taxable gross receipts xxxx ==== ANNEX A-7 Illustration of Allocation of Input Tax between Taxable and Non-Taxable Operation Illustrative data: Sales: Subject to normal VAT rate P300,000 Non-VAT or exempt activity 200,000 Purchases which cannot be directly attributed to taxable and exempt activity 60,000 Input tax (60,000 x 12%) 7,200 Computation of Input tax on taxable sales: Taxable sales x Total input tax = Input tax attributable to taxable sales Total sales (taxable + non-VAT or exempt activity) Allowable input tax credit attributable to taxable sales = P300,000 x P7,200 = P4,320 ====== 500,000 Computation of input tax attributable to Non-VAT or exempt activity: Input tax P7,200 Less: Allowable input tax credit attributable to taxable sales 4,320 Input tax credit attributable to Non-VAT or exempt activity P2,880 ===== ANNEX A-8 Utilization of "Preprocessed" Relief Data (Annex E of RMO No. 30-2003) ANNEX A-9 Utilization of "Preprocessed" BOC Data (Annex F of RMO No. 34-2004) ANNEX A-10 Common Deficiencies/Review Findings on VAT Audit 1. Unallowable claims for input tax on local purchases a. Violation of invoicing requirements under Section 113 of the NIRC of 1997, as amended: Suppliers with deficient or no VAT registration per verification with the Bureau's information system VAT not separately billed on sales invoice (SI)/official receipt (OR) SI/OR not in the taxpayer's name SI/OR indicates sold to cash Unregistered/unauthorized SI/OR/(No Authority to Print) SI/OR not within the validity period b. No supporting documents c. Double claim/excess claim d. Out of period claims e. VAT-exempt purchases f. Zero-rated purchases from suppliers with approved application for zero-rating g. Difference of input VAT per claim, schedule of input VAT, and Financial Statements h. Failure to accomplish/complete audit procedures for big ticket purchases prescribed under RMC No. 29-2009 particularly on the submission of proofs/secondary evidence to substantiate the authenticity of purchases such as delivery receipts, check vouchers and cancelled checks. i. Deferred portion of input VAT on purchases of capital goods exceeding P1 million 2. Unallowable input taxes allocated to: a. Exempt sales/Taxable sales b. Effectively zero-rated sales with no approved application for zero-rating c. Unremitted export sales 3. Unallowable input tax on importation: a. No BOC official receipt/proof of payment of VAT b. No BOC Import Entry Declaration (IED) c. No commercial invoices d. Not in claimant's name 4. Output VAT assessed on: a. Non/under-declaration of taxable sales/receipts b. Non/under-declaration of taxable other income c. Disposal of property, plant and equipment considered as ordinary assets d. Interest income not subject to final tax e. Consigned goods not returned within sixty (60) days following the date when such goods were consigned f. Transactions with related parties g. Deemed sales transactions 5. Other findings resulting to deficiency VAT and/or imposition of compromise penalty: a. Final withholding VAT assessed to income payments (royalties, management/technical fees, etc.) to non-resident foreign corporation affiliated b. Erroneous computation of output/input tax c. Unsupported/invalid tax credits d. Mathematical error in the computation of the tax as appearing on the face of the return e. Difference of input VAT per claim, schedule of input VAT, and Financial Statements f. Failure to file required return(s)/pay tax g. Late payment of tax h. Not supplying the correct information on VAT returns ANNEX A-11 Waiver of the Statute of Limitation under the National Internal Revenue Code I, _________________________________, _____________ (Designation) of _________________________, request for approval by the Commissioner of Internal Revenue for more time to submit the documents required in connection with the investigation/reinvestigation/re-evaluation/collection enforcement of my/its Value-Added Tax liabilities for the year ____ . I/We hereby waive the defense of prescription under the statute of limitations prescribed in Sections 203 and 222, and other related provisions of the National Internal Revenue Code, and consent to the assessment and/or collection of above tax or taxes of said year which may be found due after investigation/reinvestigation/re-evaluation at any time before or after the lapse of the period of limitations fixed by said sections of the National Internal Revenue Code but not later than _______________. The intent and purpose of this waiver is to afford the Commissioner of Internal Revenue ample time to carefully consider the legal and/or factual questions involved in the determination of the aforesaid tax liabilities. It is understood, however, that the undersigned taxpayer/taxpayer represented below, by the execution of this waiver, neither admits in advance the correctness of the assessment/assessments which may be made for the year abovementioned nor waives the right to use any legal remedies accorded by law to secure a credit or refund on such tax that may have been paid for the same year pursuant to the provisions of Sections 204 and 229 of the National Internal Revenue Code. The period so stated herein may be extended by subsequent waiver in accordance with existing rules and regulations of the Bureau of Internal Revenue. Executed this _____ (date) day of _____________ (month) , _______ (year) in _______________ (place executed) , Philippines. ACCEPTED: CAESAR R. DULAY Commissioner of Internal Revenue ________________________________ (Taxpayer or Duly Authorized Signatory) (Designation) BY: ________________________________ (witness-company side) ________________________________ ________________________________ Revenue Officer (Witness) ___________ Date n Note from the Publisher: Copied verbatim from the official document. Irregular numerical sequence.