Last Priority in Audit and Investigation of 1986 Internal Revenue Tax Liabilities of Taxpayers Making Voluntary Disclosure and Adjustment of Inventory

June 30, 1987 REVENUE MEMORANDUM ORDER NO. 14-87 SUBJECT : Last Priority in Audit and Investigation of 1986 Internal Revenue Tax Liabilities of Taxpayers Making Voluntary Disclosure and Adjustment of Inventory TO : The Revenue Service Chiefs (Sector Operations and National Assessment Offices), Division Chiefs thereunder, Regional Directors, Revenue District Officers, and Others Concerned 1. STATEMENT OF POLICY: A policy to encourage voluntary disclosure of undeclared inventory preparatory to the implementation of the Value Added Tax System, to reduce administrative costs, and minimize irritants incident to the investigation of taxpayers is hereby adopted, whereby taxpayers complying with certain prescribed conditions shall be given the last priority in the audit and investigation of tax return for 1986. This policy is dictated by the lack of adequate resources necessary to conduct actual verification of the stock-in-trade of all taxpayers required to submit an inventory list annually, and the recognition of the fact which is of common knowledge that the inventory is an area which provides an inviting opportunity for tax manipulation and a fertile ground for graft and corruption. The adoption of this policy is, therefore, aimed at giving the taxpayers concerned a chance to adjust and correct their inventory for all tax purposes, and enabling the government to realize much-needed revenues which otherwise would remain uncollected. II. SCOPE: The privilege of last priority in audit and investigation shall extend only to the 1986 income, sales, and subsequent sales tax returns. It shall be available to any taxpayer except one receiving purely compensation income. "Last priority" means that the audit and investigation of returns shall be conducted only when authorized by the Commissioner of Internal Revenue. The privilege of last priority shall not, however, apply to the following cases: 1. Where verification is necessary for the Commissioner of Internal Revenue to obtain information relevant to the tax liability of another person pursuant to Section 7(b) of the Tax Code, as amended; or 2. Where the taxpayer requests for a refund or credit of any taxes paid. III. CONDITIONS FOR AVAILMENT OF PRIVILEGE: 1. Who may avail . Any taxpayer liable to income tax, sales tax, or subsequent sales tax whether as manufacturer, producer, importer, or dealer, or engaged in any trade or business where inventory is a factor in the determination of income, may avail of the privilege of last priority. 2. Conditions for availment of privilege . In order that the availment of the privilege of last priority in audit and investigation shall be valid, the taxpayer must comply with the following conditions: a. File a sworn statement of his actual inventories whether finished goods, goods in process and/or raw materials as of December 31, 1986 and June 30, 1987. Such sworn statement, which shall be in the form shown in "Annex A" hereof, must be signed by the taxpayer himself, in the case of a single proprietorship, or by the President, Treasurer or Manager in the case of a corporation and shall be attached to the amended income tax return to be filed. The inventory should show the following information: quantity, description of article, unit cost, and value. Articles of the same general description and of small values may be reflected in the inventory as a lot. acd Only an increase in inventory value of not less than P100,000 shall qualify for the privilege granted herein. b. File amended income tax, sales tax, and/or subsequent sales tax returns for 1986 and amended sales tax and/or subsequent sales tax returns for the first six months of 1987 based on the increases in the values of his inventories as of December 31, 1986 and June 30, 1987. If the taxpayer is a corporation, it shall also file amended income tax returns for the first two quarters of 1987. To the amended returns shall be attached copies of the original tax returns filed for the periods mentioned above, together with copies of the confirmation/official receipts issued. c. Pay additional income tax per 1986 amended income tax returns, computed at the rate of 13.5% of the additional taxable income (increase in value of inventory) which shall be deemed an unexplained capital or undeclared income for 1986. The increase in value of inventory shall be determined by deducting the value of the inventory as of December 31, 1986 appearing in the audited financial statements from the value of the adjusted inventory as of December 31, 1986. For purposes of checking the correctness of the increase in value of inventory, the taxpayers shall attach to his Sworn Statement of Actual Inventory to be filed hereunder a copy of his inventory as of December 31, 1986 duly stamped as received by the proper revenue office. acd The inventory as of June 30, 1987 should reflect the actual inventory as of that date, taking into account the adjusted inventory as of December 31, 1986 and the sales and purchases during the first semester of 1987. The inventory as of December 31, 1987 to be filed in January, 1988 shall be subject to verification. d. Pay additional sales tax and/or subsequent sales tax per amended tax returns, applying the appropriate rate (1.5%, 10%, 20%, or 30%) of sales tax depending on the nature of the sales and classification of the articles being handled. The amount of sales tax paid may be credited against taxpayer's future sales tax liability as allowed under existing laws. casia e. File the inventories and amended tax returns, and pay the additional income and business taxes not later than August 14, 1987. However, if the amount of additional income tax to be paid is over P50,000.00, but not more than P100,000.00, the same may be paid in two equal installments, the first installment to be paid upon filing of the amended tax returns and the second installment on or before September 30. 1987. If the income tax is over P100,000, the same may be paid in three equal installments, the first two payable as above indicated, and the third on or before October 30, 1987. In all cases business taxes shall be paid in full upon filing the return. f. All sales beginning July 1, 1987 shall be covered by the required sales invoices. If a taxpayer has not filed any required income tax or sales tax return for the year 1986 and now opts to file a "late" return, he shall be subject to the regular rates of tax and surcharges and penalties prescribed by law, provided that where the return involves a voluntary disclosure of inventory, the penalties and surcharges attaching thereto shall be abated. IV. IMMUNITY: Taxpayers availing of the privilege granted herein shall not be immune from investigation with respect to their tax liabilities for the year 1986, but they shall be given the benefit of being last in the order of priority in the audit and investigation of tax returns for said year. Accordingly, they shall not be subjected to tax investigation for 1986 except upon prior written authority from the Commissioner of Internal Revenue, and only in the cases specified in Paragraph II hereof or where there is an indication of fraud in the availment of this privilege. In order to give taxpayers ample opportunity to avail of this privilege, the verification of inventories by special teams or other authorized groups of revenue personnel shall be suspended upon submission by the taxpayer of a letter to the Commissioner, or the Revenue Service Chief concerned, or the Regional Director, or the proper Division Chief or the Revenue District Officer, signifying his intention and offer to take advantage of this voluntary disclosure scheme within the period allowed herein. cd i V. EFFECT OF NON-AVAILMENT: Those who would not avail of this privilege of last priority in audit and investigation shall be subject to rigid and exhaustive verification of their inventories and examination of their books of accounts and other accounting records. VI. DATE OF EFFECTIVITY: This Order shall take effect immediately. (SGD.) BIENVENIDO A. TAN, JR. Commissioner of Internal Revenue