Issue-Based Audit under the VAT Audit Program

September 19, 2016 REVENUE MEMORANDUM ORDER NO. 059-16 SUBJECT : Issue-Based Audit under the VAT Audit Program TO : All Internal Revenue Officers and Others Concerned I. Objectives 1. To increase audit coverage of VAT-registered taxpayers; 2. To introduce issue-based audit as part of the VAT Audit Program (VAP); 3. To facilitate completion and reporting of cases under the VAP; and 4. To prescribe policies for issue-based audits under VAP. II. Coverage and Selection Criteria This order shall cover the issue-based audit/investigation of VAT liabilities of VAT taxpayers by the VAT Audit Section in the Assessment Division of Revenue Regional Offices for taxable quarter(s) of 2015 and thereafter. Cases for issue-based audit shall be selected following these criteria: A. Mandatory Case: 1. Taxpayers with VAT returns reflecting erroneous input tax carry-over (Selection Code: ITCO) B. Priority Cases: 1. Taxpayers whose VAT compliance is below the established industry benchmarks (Selection Code: BENI) CAIHTE 2. Taxpayers with zero-rated and/or exempt sales due to availment of tax incentives or exemptions (Selection Code: ZEXI) 3. Taxpayers engaged in business where 80%, more or less, of their transactions are on a cash basis and whose purchases of goods and services do not generate substantial amount of input tax, such as restaurants, remittance/payment centers, etc. (Selection Code: CASI) 4. Taxpayers with VATable transactions which were subjected to expanded withholding tax but with no VAT remittance (Based on BIR Form Nos. 2550Q and 1604) (Selection Code: VTXI) 5. Taxpayers who failed to remit/declare VAT due from purchase of services from non-resident aliens (Based on BIR Form Nos. 2550Q and 1600) (Selection Code: NRAI) 6. Taxpayers who fail to declare gross sales/receipts subjected to VAT withholding on purchases of goods/services with waiver of privilege to claim input tax credit [creditable]; (Based on BIR Form Nos. 2550Q and 1600) (Selection Code: VTWI) 7. Taxpayers whose gross sales/receipts per income tax returns are greater than gross sales/receipts declared per VAT returns (Selection Code: GSRI) 8. Taxpayers filing percentage tax returns whose gross sales/receipts exceed the VAT threshold (Selection Code: PERI) C. Exceptions: The following VAT returns shall be excluded from the coverage of this Order: 1. Claims for issuance of Tax Credit Certificates/refunds; and 2. VAT returns selected for audit by the National Investigation Division under the Enforcement and Advocacy Service and by the Regional Investigation Division of the Revenue Regional Offices. III. Policies and Procedures 1. Only Revenue Officers-Assessment (ROs-A) in the VAT Audit Section of the Assessment Division shall be authorized to conduct audit/investigation of VAT returns, whether in principal or assisting capacity. 2. The VAT Audit Section Chief shall identify VAT taxpayers for issue-based audit in accordance with the selection criteria prescribed in this Order for approval of the Regional Director (RD). 3. The Electronic Letter of Authority Monitoring System (eLAMS) or eTIS-CMS, where applicable, shall be used in the request, approval and issuance of eLAs, as well as in updating the status of the same. 4. The Assistant Commissioner-Assessment Service (ACIR-AS) may review and evaluate the approved list, which may be retrieved from the eLAMS or eTIS-CMS, to determine compliance with the guidelines set in selecting the VAT taxpayers for audit and in the assignment of cases. If upon evaluation, it is found out that a violation has been committed, the ACIR-AS thru the Deputy Commissioner-Operations Group (DCIR-OG), may recommend to the Commissioner the cancellation of the eLA and the institution of administrative proceedings against the erring official and/or employee. DETACa 5. One (1) eLA shall be issued for each taxable quarter or for two (2) quarters by the RD upon recommendation of the VAT Audit Section Chief thru the Chief, Assessment Division. 6. If an eLA has been issued under the VAP even for one (1) quarter or for two (2) quarters only, and subsequently, the same taxpayer becomes a candidate for regular audit in the Revenue District Office (RDO) based on the selection criteria prescribed in the BIR Audit Program or memorandum order issued for the purpose, the eLA covering the same taxable year for regular audit of the RDO should not include the VAT liability. 7. Each RO in the VAT Audit Section shall be required to conduct issue-based audit on ten (10) out of the maximum workload of thirty (30) cases, not counting the mandatory ITCO cases. Thus, each RO shall be assigned 10 issue-based cases based on the selection criteria prescribed in this Order and 20 regular cases based on the selection criteria identified in RMO No. 20-2012 at a given time, subject to replenishment upon the submission of the report of investigation/closure of each case. However, no RO shall be assigned the maximum workload of 10 issue-based and 20 regular cases if there are other ROs who have not been assigned the same number of cases. 8. All pending cases covered by eLAs, including cases covered by Memorandum of Assignment (cases for reinvestigation) as of the effectivity of this Order shall be counted as part of the initial workload of the RO. Thus, no new case pursuant to this Order shall be assigned to the concerned Revenue Officer until such time that his workload shall fall below the maximum workload. 9. Before the service of the eLA, the RO assigned shall perform audit analysis and prepare an Audit Plan (Annex "A") for each case to provide an audit trail for the scope of the audit and to ensure that the audit activity planned, and books and records to be examined will address the identified risks. 10. The RO shall serve, together with the electronic Letter of Authority (eLA), the Notice for the Presentation/Submission of Documents/Records (Annex "B") with checklist of requirements to the taxpayers. The concerned taxpayer shall be given ten (10) days from receipt of the Notice to present/submit the required documents and records. If he/it does not comply with the Notice, a reminder letter (Annex "C") shall be sent immediately after the lapse of the ten-day period before a Subpoena Duces Tecum (SDT) can be recommended for issuance. No further extension for the presentation/submission of documents and records shall be allowed. 11. To facilitate the reporting of VAT audit cases, ROs shall perform only the audit procedures under Revenue Audit Memorandum Order (RAMO) No. 1-99, VAT Audit Manual, and in other revenue issuances applicable to risks identified for case selection and as a result of pre-audit analysis. Likewise, only documentary requirements prescribed in RMO No. 53-98, as amended by RMO Nos. 16-2007, 22-2007 and Revenue Memorandum Circular No. 29-2009 relating to big ticket items, that are applicable and relevant to the case, shall be attached to the docket. Nevertheless, the RO is not precluded from applying the relevant policies and procedures of the aforementioned revenue issuances depending on the risks/areas of assessment found. 12. Third Party Information (TPI) available in the National Office shall be utilized in the audit of VAT taxpayers. For expediency, the VAT Audit Section Chief need not prepare the required Request Form. Upon receipt of the List of Selected Taxpayers for VAT Audit with eLAs Issued from the Assessment Division, the AS shall furnish the Audit Information Tax Exemption and Incentives Division (AITEID) with a copy of the said list. Subsequently, the AITEID shall provide the concerned VAT Audit Section of the Assessment Division with the preprocessed RELIEF data within five (5) days from receipt of the list. aDSIHc The VAT Audit Section Chief shall submit reports prescribed under existing revenue issuances on the results of the utilization of the preprocessed RELIEF data. 13. Revenue Officers shall finish their cases and submit reports of investigation within sixty (60) and ninety (90) days from the date of issuance of eLAs covering one (1) and two (2) quarters, respectively. If the RO cannot submit the report of investigation within the prescribed audit period, he shall prepare a progress report stating therein the reason for the delay to be noted by the VAT Audit Section Chief who shall furnish a copy thereof to the Regional Director thru the Chief, Assessment Division prior to the lapse of the 60 or 90-day period, as the case may be. 14. Based on the audit findings or violations uncovered during the audit, the VAT Audit Section Chief may recommend surveillance, closure or other enforcement activity on the taxpayer. If there are findings on VAT that may impact the income tax aspect, such findings shall be communicated by the Chief, AD to the concerned investigating office. The head of the investigating office is required to submit to the Chief AD a written memorandum as to the action taken on these findings. Thereafter, the Chief AD shall monitor the same during the review of the case. 15. In case there are deficiency VAT liabilities as result of the audit, the issuance of Preliminary Assessment Notice (PAN) and Final Assessment Notice (FAN) will be in accordance with existing revenue issuances. All cases, even those with deficiency taxes agreed to be paid by the taxpayer, should have, at the very least, duly issued PANs. 16. Cases returned to the RO after review for compliance with certain documentary audit requirements or for further conduct of audit to meet some procedural requirements or for correction of the report and/or PAN shall be considered as an addition to his existing workload upon receipt of the returned case or docket. In case the ROs' inventory exceeded the maximum workload upon receipt of the returned cases, the excess thereon shall not be considered as a violation of this Order. Returned cases requiring compliance with certain review requirements shall be acted upon within fifteen (15) days from the receipt of the docket to ensure the conduct of quality audit and that top priority action shall be given by the concerned RO on these returned cases. 17. Issue-based cases referred to the Legal Division for issuance of SDT, issuance of legal opinion or for filing of criminal action shall be removed from the inventory of the concerned RO for purposes of replenishment of cases. The SDT shall be issued and served in accordance with RMO No. 10-2013, as amended by RMO No. 8-2014. However, once the case is returned to the RO for continuation of audit/investigation after rendering the desired resolution/opinion on certain legal issues or after compliance of the taxpayer with the SDT, this shall be considered as part of his inventory or workload. If such returned cases result to an excess over the maximum workload, this situation will not be considered a violation. 18. All reports of investigation shall be submitted by the VAT Audit Section Chief to the Review and Evaluation Section of the Assessment Division for regular review and appropriate recommendation by the Chief, Assessment Division prior to approval by the Regional Director. The Regional Director shall act on these cases within five (5) days from receipt thereof. 19. Dockets on selected paid cases may be subjected to revalida upon instruction of the Commissioner. 20. The AS shall closely monitor the progress of eLA cases issued under the VAP. For this purpose, the concerned office under the AS shall submit a monthly summary report on the results of the VAP not later than the 10th day after the close of each month. IV. Reporting Requirements a. The Chief, Assessment Division shall submit to the ACIR-AS the following reports not later than the 10th day of each month: ETHIDa Name of Report Annex 1. List of Selected Taxpayers for VAT Audit with D eLAs Issued 2. Monthly Report on Assessment Notices Issued/ E Protested/Cancelled 3. Monthly Report on Cases Collected F 4. Monthly Report on Disputed and Collectible G Assessments Posted in Form 40 5. Monthly Report on eLAs Issued that were H Cancelled/Transferred to Other Office/cannot be Located Taxpayers/Cases with No Discrepancy 6. Monthly Report on Cases Referred to the Legal I Division b. The Chiefs of the Legal Division shall submit to the ACIR-AS, a monthly status report of cases (Annex J) not later than the 10th day of the month following the month of receipt of the docket from the VAT Audit Section thru the Chief, Assessment Division. c. The Chiefs of the Assessment and Legal Divisions shall furnish their concerned Regional Director with a copy of the reports submitted to the ACIR-AS. Upon the effectivity of this Order, the report format prescribed herein shall be strictly observed by all Regional Assessment Divisions and Legal Divisions. V. Violations Any violation of this Order shall be referred by the concerned revenue official to the ACIR-Internal Affairs Service (IAS), Attention: The Chief, Internal Investigation Division (IID) for investigation or the IAS, through the IID, may initiate its own fact-finding revalida on the violation/infraction of revenue officials/officers. In this regard, the ACIR-IAS, through the DCIR-OG, may recommend to the Commissioner the relief, re-assignment, transfer or imposition of administrative sanctions on any revenue official/RO violating any provisions of this Order. VI. Repealing Clause All other issuances and/or portions thereof that are inconsistent with this Order are hereby repealed, modified or amended accordingly. VII. Effectivity This order shall take effect immediately. (SGD.) NESTOR S. VALEROSO Deputy Commissioner, Operations Group Officer-in-Charge ANNEX A General VAT Audit Plan Taxpayer : ________________________________________________ Address : ________________________________________________ TIN : ________________________________________________ VAT period(s) : ____________________ Reason(s) for selection : All applicable codes : ____________________________________________ Additional risks identified from stage I.1 below : ____________________________ ________________________________________________ ___________________ ________________________________________________ ___________________ Records and books required to address identified risks : ______________________ ________________________________________________ ___________________ ________________________________________________ ___________________ Letter of Authority No .: ________________________ Revenue Officer(s) : ______________________________________________ ________________________________________________ ______________ Group Supervisor : ______________________________________________ Estimated Time Frame : ______________ Actual Time Spent : ____________ Audit Plan submitted by : ___________________ Date : _________________ Audit Plan approved by : ___________________ Date : _________________ Audit Work Proposed Date I. Preparation/Planning 1. Pre-audit analysis to include: a. review of VAT returns, SLS, SLP and other attachments of the return as appropriate; b. determination of accounts/issues from previous audit reports/working papers/ dockets; c. determination of risk areas and issues particular to the industry. _______________________ 2. Identification and prioritization of high risks to be addressed and checks/tests to be applied. _______________________ 3. Preparation of Letter of Authority _______________________ 4. Preparation of Checklist of Requirements _______________________ 5. Preparation of questions for preliminary taxpayer interview. _______________________ II. Audit Proper 1. Service of Letter of Authority and Checklist of Requirements. _______________________ 2. Preliminary discussion, interview with taxpayer or authorized representative and ocular inspection of business premises. _______________________ 3. Gathering and evaluation of documents per checklist of requirement. _______________________ 4. Retrieval of certification/required documents from offices within and outside the Bureau, including third party data. _______________________ 5. Conduct of field audit/examination of books of accounts and financial statements relevant to the risks identified. _______________________ 6. Determination of issues/findings and computation of tax deficiencies. _______________________ 7. Documentation of evidence to support valid findings. _______________________ III. Reporting 1. Discussion with supervisor/Chief, VAT Audit Section with exceptions/findings noted. _______________________ 2. Initial presentation to the taxpayer of exceptions/findings. _______________________ 3. Evaluation of taxpayer's explanation and other documents presented by the taxpayer. _______________________ 4. Discussion of the result with Group Supervisor and Chief, VAT Audit Section. _______________________ 5. Re-computation of tax deficiency, if applicable. _______________________ 6. Preparation of notice for informal conference. _______________________ 7. Final conference with taxpayer. _______________________ 8. Preparation and submission of final report, including preparation of Payment Form, Preliminary Assessment Notice (PAN)/Final Assessment Notice (FAN), whichever is applicable. _______________________ IV. Adjustments Made Details ________________________________________________ _________ Reason for changes/additions _________________________________________ Prepared by: _________________________ ______________ Date Noted by: _________________________ ______________ Date Date Note: Should there be addition and deviation from the audit plan, the Revenue Officer should discuss with his supervisor and prepare the revised audit plan as required in the prevailing situation. ANNEX B Revenue Region No. ___ - _______ Assessment Division VAT Audit Section _________________ (Date) Notice for the Presentation/Submission of Documents/Records ________________________ ________________________ ________________________ Gentlemen : This refers to Electronic Letter of Authority (eLA) No. _____________ dated ______________ authorizing Revenue Officer _______________ under Group Supervisor ___________________ to conduct issue-based/comprehensive (underline whichever is applicable) examination/investigation of your Value Added Tax liabilities for the period from ____________ to ______________. Please submit/present within ten (10) days from receipt hereof the documents and records marked with a check on the boxes below. [ ] 1. General ledger [ ] 2. General and special journals [ ] 3. Sales journal and subsidiary sales journals [ ] 4. Purchase journal and subsidiary purchase journals [ ] 5. Cash receipts and disbursement books [ ] 6. Sales invoices and official receipts [ ] 7. Purchase invoices, purchase orders and delivery receipts for domestic purchases [ ] 8. Purchase and expense vouchers (where input taxes are claimed) [ ] 9. Bank statements, bank advices, check vouchers and all cancelled checks [ ] 10. Importation documents (e.g., Import entry declaration, bill of lading, etc.), if applicable [ ] 11. Supporting documents of dollar inward remittances for zero-rated and export sales, if applicable [ ] 12. Approved application for zero-rating or BOI registration, if applicable [ ] 13. VAT withholding tax certificates, if applicable [ ] 14. Others ______________________________________ ______________________________________ In case the issue-based audit will uncover other risk areas aside from the initially identified risk or focus of the examination/investigation, the Revenue Officer shall request the relevant documents/records and continue the audit under the above eLA. Should there be additional findings or areas of assessment after the submission of the report of investigation from an issue-based audit, another eLA may be issued on VAT liabilities for the same taxable period since VAT is not covered by the prohibition on examination and inspection more than once in a taxable year under the National Internal Revenue Code of 1997, as amended. Please acknowledge receipt of this notice by accomplishing the form prepared hereunder. Very truly yours, _____________________________ Chief, Assessment Division (Signature Over Printed Name) Acknowledgement Receipt I acknowledge receipt of the original copy of the above letter and I promise to present/submit the documents/records requested on or before _____________________. _______________________ __________________________ ________________ Taxpayer/Representative Position/Designation Date Received (Signature Over Printed Name) ANNEX C Revenue Region No. ___ - _______ Assessment Division VAT Audit Section _________________ (Date) Reminder Before Issuance of Subpoena Duces Tecum The President ________________________ ________________________ ________________________ SUBJECT: ____________________________ Sir/Madam : Revenue Officer ______________ under Group Supervisor _____________, who is assigned to conduct the investigation of your Value-Added Tax (VAT) liabilities pursuant to Electronic Letter of Authority (eLA) No. _________ dated ___________ for the period __________ from _________ to ________, has reported that you have not presented/submitted the following documents marked with a check on the boxes below. [ ] 1. General ledger [ ] 2. General and special journals [ ] 3. Sales journal and subsidiary sales journals [ ] 4. Purchase journal and subsidiary purchase journals [ ] 5. Cash receipts and disbursement books [ ] 6. Sales invoices and official receipts [ ] 7. Purchase invoices, purchase orders and delivery receipts for domestic purchases [ ] 8. Purchase and expense vouchers (where input taxes are claimed) [ ] 9. Bank statements, bank advices, check vouchers and all cancelled checks [ ] 10. Importation documents (e.g., Import entry declaration, bill of lading, etc.), if applicable [ ] 11. Supporting documents of dollar inward remittances for zero-rated and export sales, if applicable [ ] 12. Approved application for zero-rating or BOI registration, if applicable [ ] 13. VAT withholding tax certificates, if applicable [ ] 14. Others _______________________________________ _______________________________________ In case of your failure to present/submit the aforementioned requirements within five (5) days from receipt hereof, we shall recommend the issuance of a Subpoena Duces Tecum (SDT) Please acknowledge receipt of this reminder letter by accomplishing the form prepared hereunder. Very truly yours, __________________________ Chief, Assessment Division (Signature Over Printed Name) Acknowledgement Receipt I acknowledge receipt of the original copy of the above letter and I promise to present/submit the documents/records requested on or before _________________ . _______________________ __________________________ ________________ Taxpayer/Representative Position/Designation Date Received (Signature Over Printed Name) ANNEX D List of Selected Taxpayers for VAT Audit with eLAs Issued For the Month of __________ ANNEX E Monthly Report on Assessment Notices Issued/Protested/Cancelled For the Month of __________ ANNEX F Monthly Report on Cases Collected For the Month of _________ ANNEX G Monthly Report on Disputed and Collectible Assessments Posted in Form 40 For the Month of __________ ANNEX H Monthly Report on eLAs Issued that were Cancelled/Transferred to Other Office/cannot be Located Taxpayers/Cases with No Discrepancy For the Month of ____________ ANNEX I Monthly Report of Cases Referred to the Legal Division For the Month of _________ ANNEX J Monthly Report on Cases Received from VAT Audit Section For the Month of __________