Guidelines and Procedures on the Verification of Inventories

May 17, 1995 REVENUE MEMORANDUM ORDER NO. 18-95 SUBJECT : Guidelines and Procedures on the Verification of Inventories TO : All Internal Revenue Officers Concerned I. BACKGROUND It has been observed that there has been a significant decline in the reported sales of certain business establishments for the first quarter of 1995 thereby contributing partially to the overall decrease in tax collections. This unfavorable trend in sales is contrary to the increase in the country's gross national product (GNP) for the same period. Since inventories are the major components of cost goods sold which are matched in the same period against sales, the verification of inventories in relation to purchases and cost of goods sold should be undertaken in accordance with Section 16 (c) of the Tax Code authorizing the Commissioner of Internal determining his internal revenue tax liabilities. II. OBJECTIVES 1. To determine if taxpayers have declared the correct amount of sales and paid property the corresponding internal taxes through inventory verification method. 2. To provide a comprehensive and effective manner in verifying inventories, inventory lists and inventory records; 3. To monitor taxpayers' compliance with the registration of their warehouses, storage places and bodegas together with their books of inventory as provided under Revenue Regulations No. 5-94; and 4. To gather data that may be used as inputs in income value-added tax and other internal revenue tax investigation. III. SCOPE This Order covers all inventories of finished goods, work in process, raw materials, supplies and stock in trade of taxpayers as of the date of stocktaking and all inventory lists filed covering the taxable year 1994 and every taxable year thereafter, except taxpayers subject to excise tax. IV. GUIDELINES AND PROCEDURES 1. The Revenue District Officers shall create an Inventory Task Force (ITF) composed of competent and experienced revenue officers with at least one representative from each investigating group to be supervised directly by the Assistant Revenue District Officer (ARDO). 2. The RDO may appoint a team leader for a group consisting of at least four (4) revenue officers. 3. All inventory lists filed with the Revenue District Office (RDO) as of December 31, 1994 and every year thereafter shall be retrieved, collated and numbered consecutively based on the total value of inventories from the highest to the lowest in amount. The numbering shall start with the RDO number with the sequential number of the list in the middle and the year 1995 or pertinent year(s) at the end. Thus, the inventory list with the highest value belonging to a taxpayer covered by RDO North, Quezon City shall be assigned the following number: 38-001-95 4. The Revenue District Officer shall draw up a list of taxpayer selected for issuance of Mission Orders (Annex "A) stating the justification for his selection, such as where the taxpayer has not been declaring his correct income, sales, or receipts for internal revenue tax purposes. The list shall be submitted to the Regional Director for approval. 5. Copy of the list as approved by the Regional Director shall be furnished the Assistant Commissioner, Assessment Services within three days after approval. 6. Revenue District Officers shall issue Mission Order for selected taxpayers only for this purposes and within the duration of this RMO. The Mission Order shall be prepared in four copies and signed by the Revenue District Officer. 7. Likewise, a letter (Annex "B") addressed to the taxpayer stating the inventory verification shall be prepared in duplicate and shall be signed by the Revenue District Officer. 8. The said mission orders shall be numbered consecutively and assigned to members of the ITF. The initial maximum workload of each revenue officer shall not exceed five (5) cases. 9. The Revenue Officer/s shall serve the Mission Order with the corresponding letter. The Mission Order shall be distributed as follows: Original to the taxpayer Duplicate to be forwarded to the Assessment Service within three (3) days from issuance Triplicate to be duly acknowledged by the taxpayer or his authorized representative by affixing his signature over his printed name and indicating position, if received by a representative and to be attached to the docket of the case. Quadruplicate file copy of the Regional Director A photocopy of the mission order shall likewise be furnished the Assessment Division of the Regional Office. The duplicate of the letter shall also be duly acknowledged by the taxpayer or his authorized representative and the said copy shall be attached to the docket of the case. 10. After serving the mission order, the revenue officer/s shall perform the following inventory verification procedures: 10.1 Familiarize with the taxpayer's business and its products by interviewing the taxpayer and other knowledgeable personnel of the company and conducting a tour of the business premises. 10.2 Proceed to the warehouses, storage places, bodegas and other premises where inventories are being kept, maintained or display for sale Require the taxpayer to segregate consigned, intercompany, obsolete and other items not properly includible in inventories and to submit proofs to validate the segregation of such items. 10.3 Conduct inventory stocktaking in the presence of the taxpayer or his authorized representative. Select fast moving item/s and slow moving item/s in the inventory which can be feasibly counted. 10.4 Ascertain the correct quantity and items on hand at the tie of stocktaking. Require the taxpayer, his authorized representative or any responsible company personnel to sign and print his name on the list of inventories as physically counted on the date of stocktaking. 10.5 Verify the method of inventory valuation and ascertain if it conforms to the methods prescribed in the Tax Code, as conforms to the methods prescribed in the Tax Code, as implemented by Sec. 146-149 of Revenue Regulations No. 2. 10.6 Check all purchases of the same items stating January 1 or the first working day of January up to the date of the test verification or stocktaking. 10.7 Deduct the quantity on hand of the test-checked items from the quantity available for sales (Inventory Beginning plus Purchases). The difference should represent the quantity sold from January 1 or the first working day of January up to the time of physical count or stocktaking. 10.8 Trace the difference from the duplicate sales invoices issued. Any discrepancy in quantity (for which no sales invoices represents undeclared sales of the same item or inventory. 10.9 Compute for the value of the undeclared sales invoices by multiplying the discrepancy in quantity (for which no sales invoices were issued) by the unit selling price of the item test checked. 10.10 If the taxpayer is on perpetual inventory method, verify stock cards of selected items. Compare the beginning balance of quantity against the inventory list as of December 31, 1994 and December 31st of every years thereafter and investigate any discrepancy. Check disposal of items against sales invoices cards for which no invoices are issued shall constitute unreported sales. 11. The Revenue Officer/s shall prepare a report of investigation within thirty(30) days after service of the Mission Order and letter to the taxpayer authorizing the inventory verification. In the event that no report is forthcoming, the revenue officer shall explain in writing why a report cannot be submitted. 11.1 A Standard Verification Report Form (Annex "C") shall be used for the reports on value-added tax liabilities and/or percentage tax liabilities. 11.2 A narrative memorandum report shall be prepared setting forth the result of the verification and should contain the following elements: 11.2.1 The basis of authority to verify, that is the Mission Order number, date issued and served; 11.2.2 Profile of the taxpayer, particularly the type of business organization, nature of business, product line, other sources of income, information of its registration with the SEC, BOI, EPZA, etc.; 11.2.3 Business tax liability to which the taxpayer is subject, whether value-added tax or percentage tax; 11.2.4 A brief description as to the circumstances surrounding the service of the Mission Order, inventory count undertaken, days of delay, reasons for the delay, other verification procedures adopted, relevant records checked, actual status of inventory records and dates and result of conference; 11.2.5 Results of verification summarizing the discrepancies discovered and basis of computation of recommended deficiency taxes, if any; and 11.2.6 A recommendation as to issuance of termination letter after collection of the deficiency tax, if any, and approval of the case or issuance of assessment notice for deficiency taxes. 11.3 The Revenue Officer/s shall attach all working papers and documentary evidences which relate to their findings in the course of the inventory verification. 11.4 The following documents shall likewise be attached to the docket; 11.4.1 Duplicate copy of mission order. 11.4.2 A copy of the inventory list as of December 31, 1994 and December 31 of every year thereafter. 11.4.3 A copy of the inventory list and supporting count sheets at the time of the stocktaking or physical count duly signed by the taxpayer, his representative or any responsible company personnel. 11.4.4 A copy of authority to accept payment (ATAP, if deficiency tax was paid 11.4.5 Agreement form, if applicable 11.4.6 Table of contents 12. Within five (5) days from receipts of the docket, the report of verification shall be reviewed by the team leader (if a separate team leader was assigned by the ARDO) and the ARDO who shall sign the report and recommend it to the Revenue District Officer for approval. 13. The Revenue District Officer shall indorse the docket of the case within five (5) days after receipt from the ARDO to the Assessment notice in accordance with RMO No. 37-94. 14. The Assessment Division shall review the docket received from the RDO within five (5) days from receipt and take appropriate action, as follows: 14.1 Issue termination letter/assessment notice upon approval of the case. 14.2 Return the docket to the RDO for any discrepancy or compliance of other requirements. 15. The deficiency business taxes collected upon the inventory verification shall be credited to any deficiency taxes determined upon regular which may include the period of inventory verification, provided that the findings in the regular audit include the same nature of discrepancy. 16. The Assessment Division shall prepare a monthly report (Annex "D") in quadruplicate of inventory verification cases terminated/assessed which shall be distributed as follows: 16.1 Original Office of the Regional Director 16.2 Duplicate Assistant Commissioner, Assessment Service 16.3 Triplicate RDO (for reference in the regular district audit) 16.4 Quadruplicate File copy of the Assessment Division 17. The Assessment Service shall compare the monthly report of cases terminated/assessed against the list taxpayers selected for inventory verification and mission orders issued and report to the Office of the Deputy Commissioner Operations the result of its evaluation together with any recommended appropriate action to revenue district offices. V. EFFECTIVITY This Order shall take effect immediately and the inventory taking required under this Revenue Memorandum Order shall be undertaken annually. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue ANNEX A MISSION ORDER NO. ______________ ___________________ Date TO : Revenue Officers _____________________________ _____________________________ _____________________________ to be supervised by ______________ (Team Leader) You are hereby directed to conduct an inventory taking and verification of the goods of the hereunder named taxpayer pursuant to Section 16 (c) of the National Internal Revenue Code, as amended. Details of this Order are as follows: Duration of Mission : Thirty days Subject and Areas of Operation: ____________________________ ____________________________ ____________________________ ____________________________ ____________________________ (Name and address of taxpayer including branches, warehouses and bodegas) The strict compliance with the provisions of RMO No. ______________ authorizing Revenue District Offices to verify inventories in relation to purchases and cost of goods sold as basis for determining the internal revenue tax liabilities of taxpayers and the accordance of utmost courtesy as provided under the Code of Conduct and Discipline of the Bureau of Internal Revenue are hereby enjoined. _________________________ Revenue District Officer ANNEX B _______________ Date ___________________ ___________________ ___________________ S i r : Pursuant to Section 16 (c) of the National Internal Revenue Code, may we request that Revenue Officer(s) ________________________________ be allowed to conduct an inventory taking and verification of all goods in your business premises including all branches, warehouses and bodegas for the period from _______________ to __________, but not later than August 31, 1995. The said Revenue Officer(s) are provided with the necessary identification card(s) and Mission Order No. __________ which shall be presented to you upon service of this letter. Your cooperation in this regard will be highly appreciated. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue By: ________________________ Revenue District Officer Received by: ___________________________ ____________ Taxpayer/Authorized Representative Date