2000 Audit Program for Large Taxpayers Service

June 5, 2000 REVENUE MEMORANDUM ORDER NO. 18-00 SUBJECT : 2000 Audit Program for Large Taxpayers Service TO : Assistant Commissioner, Large Taxpayers Service, Chief, Large Taxpayers Assessment Division and All Internal Revenue Officers Concerned I. OBJECTIVES 1. To develop and prescribe audit policies, guidelines and standards necessary to improve the quality of audits; cdll 2. To ensure proper application of laws through the adoption of fair and uniform rules and procedures in the conduct of audit of large taxpayers; and 3. To enhance voluntary compliance by the strict monitoring of top corporate taxpayers and specialized industry groups. II. COVERAGE AND TYPES OF AUDIT A. COVERAGE 1. This Audit Program shall cover the income, value-added, percentage, withholding and other taxes or a particular tax liability of large taxpayers for taxable years 1998 and 1999 and uninvestigated prior years; 2. Taxable years 1998 and 1999 shall include all those corporations with fiscal years ending on or before June 30, 1999 and on or before June 30, 2000, respectively; 3. All Letters of Authority (LA)/Tax Verification Notice (TVN) to be issued pursuant to this Order shall be based on the above mentioned criteria; and 4. Non-LA cases shall be covered by Tax Verification Notices based on the following criteria: 4.1 Claims for tax credits/refunds of large taxpayers where the amount of claims do not exceed P200,000 and the gross sales/receipts do not exceed P20,000,000; 4.2 Protested cases for re-investigation; 4.3 Transfer of property in exchange for shares of stocks and other sale/exchange of stocks not listed and traded in the stock exchange; 4.4 Taxpayers requesting for change in accounting period; 4.5 Taxpayers requesting for change in the inventory method; 4.6 Taxpayers requesting for change in status from VAT to Non-VAT or vice-versa; 4.7 MCIT verification; 4.8 Final withholding tax verification on the following: 4.8.1 Fringe benefits; 4.8.2 Dividends; 4.8.3 Interest expense on FCDUs; and 4.8.4 Branch profit remittances; 4.9 Expanded withholding tax on credit card companies; and LibLex 4.10 Other cases that may be identified by the Commissioner for immediate verification. B. TYPES OF AUDIT 1. Mandatory Audit This refers to an audit which is required as a condition precedent for the issuance of tax clearance, processing of claims for tax credit/refund due to erroneous or overpayment of taxes and audit of taxpayers identified as priority target for investigation. The following shall be covered by this type of audit: 1.1 Claims for tax credit/refund of large taxpayers; 1.2 Large taxpayers undergoing mergers/consolidations/split-ups/spin-offs and other types of corporate reorganizations; 1.3 Prescribing tax cases of large taxpayers; 1.4 Large taxpayer retiring from business, and 1.5 Other cases that may be identified by the Commissioner to fall under Mandatory Audit. 2. Short Audit This refers to an audit of cases focused on certain issues that need immediate resolution to provide taxpayers certainty as to its tax treatment. It may also mean an audit by type of tax, in contrast to package audit. This non-conventional approach to audit may or may not yield additional revenues. The following shall be included under this type of audit: 2.1 Large Taxpayers with excessive input taxes for two consecutive quarters: 2.2 Issue oriented audits e.g. transfer pricing, large tax credits, industry issues; 2.3 Large Taxpayers selected for audit based on third party information; 2.4 Large Taxpayers who are franchise grantees; 2.5 Large Taxpayers subject to royalty taxes; and 2.6 Expanded withholding tax on credit card companies. 3. Package Audit This refers to an audit that covers all types of taxes: income, VAT, percentage, withholding and other taxes. 3.1 Profitable corporations with low effective tax rates for the last two (2) consecutive years; 3.2 Corporations with asset growth but reported net loss; 3.3 Corporations with history of low/non-compliance; 3.4 Multinational corporations, and 3.5 Selected profitable corporations, with the following as priority targets: 3.5.1 Utility and telecommunication companies; 3.5.2 Airlines; and 3.5.3 Information technology developers. III. AUDIT POLICIES AND GUIDELINES 1. The Chief, Large Taxpayers Assessment Division shall draw a list of taxpayers selected for audit under Section I and II above. The list shall state the name of taxpayer selected for audit, the nature of business, the amount of gross sales/receipts, the selection code, the PSIC code, and the corresponding amount of tax paid for the period. The said list shall be submitted to the Assistant Commissioner, Large Taxpayers Service for pre-approval. The pre-approved list shall then be forwarded to the Commissioner of Internal Revenue for final approval. 2. All Letters of Authority shall be issued and approved by the Commissioner of Internal Revenue. 3. All Tax Verification Notices shall be issued and approved by the ACIR, Large Taxpayers Service unless otherwise delegated in writing to the Chief, Large Taxpayers Assessment Division in order to facilitate the verification and processing of tax returns requiring the immediate issuance of certificates/tax clearance. However, the ACIR, Large Taxpayers Service may revoke anytime in writing the authority of the Chief, Large Taxpayers Assessment Division to sign Tax Verification Notices when he/she deems it necessary. 4. One Letter of Authority/Tax Verification Notice shall be issued for each taxable year/period. The investigation of tax cases of General Professional Partnerships shall include all the partners irrespective of where the partners are registered. 5. Letters of Authority/Tax Verification Notices shall be issued only when the duplicate copy of the tax returns for the taxable period/s covered by the LA or TVN is attached thereto, except in the following cases: a) Where the return of a taxpayer selected for audit cannot be located in the Large Taxpayers Assessment Division, the LA/TVN shall be issued only when there is a certification to that effect, by the Chief, Large Taxpayers Document Processing and Quality Assurance Division. b) Where the basis for the issuance of the LA/TVN is the result of a Third Party Information. 6. A Revenue Officer/Group Supervisor shall not audit/investigate the same taxpayer for two (2) consecutive years/periods. cdll IV. AUDIT REPORTS Audit reports shall follow the guidelines prescribed under audit manuals available in addition to other reporting requirements provided for under existing issuances. V. REPORTING REQUIREMENTS The following reports shall be submitted: 1. By Revenue Officers 1.1 Progress report of audit/investigation. For short audit every two (2) weeks; for package audit monthly; 1.2 Field Audit/Investigation Reports; 1.3 Monthly Summary of audit activities, to include nature of discrepancies, industry issues, audit effort ratio and amount assessed/collected; and 1.4 Monthly Report on Pending Inventory of Cases/Dockets (covered by both LAs and TVNs). The foregoing reports shall be submitted to the Group Supervisor not later than on the 3rd day of the following month. 2. By Group Supervisors 2.1 Consolidated progress reports of all cases/dockets submitted by Revenue Officers; 2.2 Consolidated list of field audit reports submitted by Revenue Officers; 2.3 Consolidated report on audit activities; and 2.4 Consolidated report of Pending Inventory of Cases/Dockets (covered by both LAs and TVNs). The foregoing reports shall be submitted to the Chief, LTAD not later than on the 5th day of the following month. prcd 3. By Chief, Large Taxpayers Assessment Division 3.1 Monthly List of LAs /TINs Issued This report shall contain the name of the taxpayer, LA/TVN numbers, date of issue, audit case selection code, and the taxable period covered. 3.2 Monthly Status of LAs /TVNs Issued and Acted Upon This report shall reflect any reassignment, loss, cancellation, or spoilage of LAs/TVNs, referrals to other Offices, and reporting of cases covered by LAs/TVNs during the particular month. Cases still pending audit or investigation as of the end of the month and/or terminated cases where no official reports thereon have yet been rendered and duly transmitted to the Large Taxpayers Service shall not be included in this report. 3.3 Monthly Summary of Assessment and Collection Activities This report shall contain detailed information on the results of the audit/investigation conducted per case and per tax type, including the processing of claims for tax credit/refunds. This report also reflects the summary of the number of tax cases acted upon and closed by the Office during the given month including original investigation/verification cases, and dockets returned by the Large Taxpayers Service for compliance of certain reporting requirements. Only cases/dockets actually transmitted for review to the LTS as of the end of each month shall be included in this report. This report shall not include collections arising from voluntary payment of capital gains arising from sales/transfer of shares of stock not traded through stock market. 3.4 Monthly Inventory of Pending Cases/Dockets (covered by both LAs and TVNs) This report shall contain a summary of the Revenue Officer's Monthly Report of Pending Inventory being accomplished individually by Revenue Officers for both original investigation and reinvestigation cases. It reflects the number of pending cases per tax year, the inventory of pending cases at the beginning of each month, the number of new dockets/cases started during the month, the number of returned dockets, the number of closed/reported cases, and the total number of pending inventory as of the end of the month covered by the report. In addition to these information, this report also shows an aging analysis in number of months of the pending cases/dockets. These reports shall be -submitted to the Assistant Commissioner, Large Taxpayers Service not later than on the 10th day of the following month. 4. By Assistant Commissioner, Large Taxpayers Service 4.1 Monthly List of LAs/TVNs issued; 4.2 Monthly Status Report of all LAs/TVNs issued; 4.3 Monthly Summary of cases/dockets received for review, returned to Large Taxpayers Assessment Division, referred to other offices and forwarded to CIR for final evaluation and approval; 4.4 Monthly Summary of Taxes Assessed/Collected; and 4.5 Monthly Inventory of Pending Cases/Dockets (covered by both LAs and TVNs). The foregoing reports shall be submitted to the Commissioner not later than on the 15th day of the following month. VI. VIOLATIONS AND PENALTIES Violations of any provision of this Order or any unauthorized deviations from the foregoing policies and instructions shall be dealt with accordingly. The ACIR, Large Taxpayers Service shall report any violation to the Inspection Service, for appropriate action. In this regard, the ACIR, Inspection Service, may recommend to the Commissioner of Internal Revenue the transfer, reassignment, or relief of any Revenue Officer/Official found to have violated any of the provisions prescribed in this Order. VII. EFFECTIVITY This Order takes effect immediately. (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue