Test-Verification of Inventories as of December 31, 1987

February 10, 1988 REVENUE MEMORANDUM ORDER NO. 06-88 SUBJECT : Test-Verification of Inventories as of December 31, 1987 TO : All Internal Revenue Officers and Others Concerned A. OBJECTIVE To ensure the accuracy of claims for transitory tax credits attributable to inventories as of December 31, 1987, and discourage sellers of commodities from taking advantage of the introduction of Value-Added Tax by overpricing, inventory lists of stocks on hand as of December 31, 1987 filed by taxpayers as required under existing regulations shall be subjected to test-verification by an inventory verification team to be organized under a separate revenue special order. Under no circumstance shall such verification test be conducted by revenue district offices. aisa dc B. SCOPE This Order covers all inventories of goods, materials, supplies, and stocks-in-trade filed by taxpayer for the taxable year 1987, due on January 31, 1988. C. PROCEDURES FOR HANDLING AND ANALYZING INVENTORY LISTS For purposes of uniformity, the following guidelines are hereby prescribed: 1. Revenue District Office 1.1 All inventories filed with the district officers shall be numbered consecutively based on the dates of receipt. 1.2 Segregate inventory lists as follows: a. Subject to VAT only: (1) Manufacturer/Importer (2) Wholesaler/Retailer (3) Seller of services (contractor and broker) b. Exempt from VAT only; and c. Subject to VAT and exempt from VAT 1.3 Assign the inventory listings to the revenue enforcement officers of the district office for office verification and analysis. The officer should consider the following points: a. If the list includes goods subject to VAT and exempt from VAT, like agricultural food products in their original state, books, fertilizers, etc., the exempt goods should be excluded from the summary to be prepared by the officers for no input taxes are attributable on exempt articles; b. If the taxpayer filed two inventories - one for income tax and another for VAT purposes, the inventory filed for VAT purposes should be analyzed; c. If the inventory shows that goods imported prior to 1986 subjected to the final advance sales tax, the same should be segregated, traced back and compared with the inventory listings filed for 1986. 1.4 Prepare a summary of inventories in duplicate in accordance with the form prescribed in Annex "A" hereof. The original copy of the summary to be forwarded to the Chief, VAT Division not later than February 29, 1988 and the duplicate copy thereof to be retained by the revenue District Officer as reference materials for the district office audit to be conducted later on. 1.5 The original and duplicate copies of the inventories shall be filed consecutively and in alphabetical order to be made available to the inventory verification teams. 1.6 The inventory should be assigned, not for field audit or verification, to all revenue enforcement officers for analysis of the inventories. No Letters of Authority should be issued for this purpose since an office verification/analysis should be conducted only in the office and not in connection with full audit of an internal revenue tax liability of a taxpayer filing the inventory. 2. VAT Division 2.1 The Chief, VAT Division shall supervise and coordinate the selective field test verification of inventories based on the summary reports received from Revenue District Offices. For this purpose, ten (10) teams of two (2) revenue enforcement officers shall be organized to verify the following: a. Method of valuation used by the taxpayer. b. Method of costing or valuing the inventory. 2.2 Determine the unreported sales using the quantity as follows: Select fast-moving items in the inventory which can feasibly be counted. Check all purchases of the same items starting January 1 up to the date of the test-verification. Ascertain the quantity on hand at the time of the test-checking and deduct the said quantity on hand from the quantity available for sale (Inventory Beginning plus Purchases). Trace the difference from the duplicate of sales invoices, if any. The difference is presumed sold, and any quantity not evidenced by sales invoices represents undeclared sales of the same item or inventory to be reported as prescribed in Annex "C". 2.3 Test-check overpricing by ascertaining from the sales invoices issued for November and December, 1987, the price per unit of a particular item in the inventory. Compare this unit's selling price of the same type of article sold for January and February 1988. Report the results in Annex "D". 2.4 Submit reports to the Chief, VAT Division not later than Monday morning of the week following the conduct of inventory test verification. The Chief, VAT Division shall analyze the findings of the teams and makes summary reports, with the observations and recommendations to Deputy Commissioner Victor A. Deoferio, Jr. This Order shall take effect immediately. BIENVENIDO A. TAN, JR. Commissioner ANNEX A ANNEX B ANNEX C