Publishing Questions and Answers in the Interpretation of Revenue Memorandum Order No. 14-87

July 24, 1987 REVENUE MEMORANDUM CIRCULAR NO. 33-87 SUBJECT : Publishing Questions and Answers in the Interpretation of Revenue Memorandum Order No. 14-87 TO : All Internal Revenue Officers and Others Concerned The following are the questions and answers in the interpretation of the provisions of Revenue Memorandum Order No. 14-87. Question 1 Are the fish and prawns in the ponds considered stock in trade to be qualified to avail of RMO 14-87? Answer 1 Yes, if it is an integral factor in the determination of income. Question 2 Can a taxpayer avail of the privilege of last priority in audit under RMO 14-87 if he has mixed income consisting of 70% service income and only 30% buy-and-sell income where inventory is involved? Answer 2 Yes, if inventory is a factor in the determination of income and the increase in value of the inventory is at least P100,000. However, the privilege of last priority in audit or investigation shall apply only to his trading activity. Question 3 What is the basis of the increase in value of the inventory of the qualifying P100,000 - as of December 31, 1986 only or also as of June 30, 1987? Answer 3 P100,000 increase in the value of inventory as of December 31, 1986. Question 4 What is the treatment for corporations on the fiscal year basis with respect to period of availment? Answer 4 Only corporations of fiscal year basis up to March 30, 1987 may avail of RMO 14-87. Question 5 May a corporation which reported a loss in 1986 avail of RMO 14-87 by reporting an increase of inventory of P100,000 and pay 13.5% and the corresponding sales tax? Answer 5 Yes, because the additional income tax to be paid at 13.5% and the corresponding sales tax are based on the increase in the value of the inventory. Question 6 May cottage and handicraft producers who enjoy certain exemptions from sales taxes avail of RMO 14-87 by just submitting the sworn statement of their actual inventory and pay the corresponding 13.5% additional income tax without paying any sales taxes? Answer 6 Cottage and handicraft producers are now subject to tax. Therefore, they have to pay the 13.5% income tax based on the increase of the value of their inventory and the appropriate sales tax. Question 7 May sellers of agricultural products who enjoy sales tax exemption avail of RMO 14-87 by just submitting the sworn statement of their actual inventory and pay the corresponding 13.5% additional income tax without paying any sales taxes? Answer 7 Dealers of agricultural products in their original state may avail of the last priority privilege by paying the 13.5% additional income tax and the graduated annual fixed tax based on their gross sales in 1986 plus the increase in the inventory. Question 8 An individual has three (3) kinds of business - manufacturer, retailer and importer. Is the minimum of P100,000 increase attributed to three (3) kinds of inventory or to each kind of inventory per kind of business? Answer 8 RMO 14-87 contemplates an increase of inventory of at least P100,000 for the year 1986 without regard to the kind of business. Question 9 A general merchandise businessman is asking if he may submit a sworn statement of actual inventory as of December 31, 1986 with the option of not reporting the inventory as of June 30, 1987. Answer 9 The submission of the sworn statement of inventories as of December 31, 1986 is mandatory. If the additional inventory remains unsold as of June 30, 1987, the filing of the inventory as of said date may be dispensed with. Question 10 Could the adjusted inventory as of December 31, 1986 be in lump sum? Or at least itemized in categories or lots, but, not down to the last single item? Answer 10 Yes, by lots if the articles are of small value and of the same general description and classification as to essential, ordinary, etc. Question 11 Does sworn statement of actual inventory require classification as to locally purchased and imported and the corresponding sales tax? Answer 11 The sworn statement of actual inventory should contain a brief description of the articles and the classification whether locally purchased or imported. Question 12 What is the basis of the additional sales tax for the amended sales tax returns? Answer 12 The increase in the value of the ending inventory in the calendar year 1986 or fiscal year ending up to March 31, 1987 shall be the basis. Question 13 Should retailers of PX goods pay 1.5% sales tax for their increase in inventories together with the 13.5% income tax? Answer 13 Retailers of PX goods should pay the appropriate advance sales tax because these inventories are deemed imported. Question 14 A retailer of watches and jewelries is asking whether he could pay 1.5% sales tax, because he is definitely not an importer of such luxurious items. Answer 14 Retailers of articles of foreign origin are required to pay the appropriate advance sales tax, as the articles are deemed untaxed imported goods. Question 15 Does the amended income tax return require amended financial statements (also audited) to be attached? Or the BIR will just require the taxpayers, as in previous "amnesties" to fill up a special BIR form? Answer 15 The amended financial statement to be attached to the income tax returns need not be audited. Question 16 Taxpayer will disclose his unreported inventory (increase) under RMO 14-87 at the same time an unreported income not related to the inventory. At what rate should the undeclared income be taxed? Answer 16 RMO 14-87 contemplates only of increase of inventory, which is either considered unexplained capital or undeclared income. If there is unreported income other than from an increase in inventory, such unreported income is subject to the regular rates of tax and the taxpayer cannot avail himself of the last priority in audit. Question 17 A partnership firm of 3 partners which registered an increased inventory of 3 million pesos and paid the sales tax and 13.5% additional income tax, accordingly the three million pesos were divided to the three partners, each with P1M, if they were required to pay the 10% dividend tax, would this constitute double taxation? aisa dc Answer 17 Should the general partnership avail of this last priority, the partners shall be subject to the 15% dividend tax to the extent of their share of the partnership profit whether distributed or not. Question 18 Can the taxpayer file another adjusted inventory after he has availed of RMO 14-87? Answer 18 A taxpayer may amend or modify his returns, statement or declaration at any time within the period up to August 14, 1987. Question 19 A jewelry store who had already paid his compromise sales tax of P6,000 for 1986 wishes to avail of RMO 14-87 by increasing his inventory by P100,000 and pay the corresponding 13.5% additional income tax. The question is whether the compromise sales tax of P6,000 could be credited or deducted from the taxes under RMO 14-87? Answer 19 No. Because the amended sales tax returns and the sales taxes to be paid accordingly are based on the increase in the value of the inventory and does not consider tax credit of tax previously paid. Question 20 A corporation availed of RMO 14-87 by increasing its inventory by P1M and paid the 13.5% additional income tax of P135,000. Is the increase of capital of P865,000, (P1M minus 135,000 = P865,000) considered tax paid. Answer 20. Yes, provided he pays also the appropriate sales tax. Question 21 Why should the sales tax be paid (increase in inventory) when the item is not yet sold? cd i Answer 21 The increase in inventory for sales tax return purposes is considered as a voluntary declaration of untaxed goods. Question 22 At what stage of the investigation or inventory taking will the filing of a letter manifesting willingness to avail of the last priority in audit suspend such investigation or inventory taking? Answer 22 Up to the stage where there are no findings yet of a tax liability. Question 23 How are you going to consider the case of a taxpayer who has a mixed income, for example, a producer and a contractor who files a consolidated income tax return, are you going to examine him for his contractor income and his producer income only the last priority? Answer 23 The last priority in audit applies only to taxpayers where inventory is an integral factor in the determination of income. If the audit can be separated, then last priority in audit should be accorded only on the records of the particular taxpayer as it affects the operational income as a producer. Question 24 Will the payment of 1.5% subsequent sales tax be credited against any sales tax liability that may arise from any subsequent amended sales tax returns? Answer 24 No, because under existing laws the payment of the 1.5% subsequent sales tax cannot be the subject of a tax credit. Question 25 - Please explain why last priority audit does not apply to cases of refund or tax credit. Answer 25 Last priority in audit and investigation cannot apply to taxpayers requesting for refund or credit because verification of records is a must in determining whether refund can be given or not. Question 26 May payment under RMO 14-87 be effected through a tax credit certificate? Answer 26 Payment under RMO 14-87 cannot be effected thru a tax credit certificate but only thru cash payment. Question 27 A taxpayer who avails of RMO 14-87 (increase in inventory - classified as ordinary article of P100,000) will pay the following: Amended ITR - 13.5% x P100,000 P13,500 Amended STR - 20% x P100,000 20,000 P33,500 Is this correct? Answer 27 The illustrative computation is correct. In addition, the additional inventory shall be subject to the regular income and sales tax rates in 1987. If unsold as of June 30, 1987, no income or sales tax shall accrue. Question 28 How may a taxpayer avail of the last priority in audit and investigation under RMO 14-87? Answer 28 A taxpayer may avail of the last priority in audit and investigation by attaching to the sworn statement of inventory and amended returns a covering letter. All Internal Revenue Officers and others concerned are enjoined to give this Revenue Memorandum Circular the widest publicity as possible. (SGD.) BIENVENIDO A. TAN, JR. Commissioner