Criteria for Assigning Tax Returns for Sectoral Audit by the Audit Divisions

August 24, 1984 REVENUE MEMORANDUM ORDER NO. 26-84 SUBJECT : Criteria for Assigning Tax Returns for Sectoral Audit by the Audit Divisions 1. Purpose This Revenue Memorandum Order delineates the primary and functional audit jurisdiction of the Audit Divisions in the National Office to investigate tax cases by line of industry. 2. Criteria for assigning sectors of industry to the Audit Divisions . Sectors of industries are hereby assigned to the different audit divisions by applying the following primary and, if necessary, alternate criteria. aisa dc 2.1 The primary criteria allocates the various industry sectors among the audit divisions by reference to the NEDA Industry Classification Guide. 2.2 The alterate criteria - "pre-dominant line-of-industry factor" and the "final product factor" - shall be applied in situations where the primary criteria is not adequate to determine which audit division should have primary audit jurisdiction over a taxpayer. 3. Application of the primary criteria . The following sectors of industries are assigned to the Audit Divisions on the basis of the name/designation of specific lines of industries described in the Industry Classification Guide. A. AGRICULTURE & NATURAL RESOURCES DIVISION A.1 Agricultural Crops Production A. 1.1 Palay production 1.2 Corn production 1.3 Vegetable, roots, and tuber crops production 1.4 Fruits and nuts (except coconut) production 1.5 Coconut production, including copra-making in the farm 1.6 Sugar cane production, including muscovado sugar making in the farm 1.7 Tobacco production 1.8 Fiber crops production 1.9 Other crops (specify) A.2 Livestock, Poultry and other Animals Production A. 2.1 Livestock and livestock products production 2.2 Poultry and poultry products production 2.3 Other animals production (specify) A.3 Agricultural Services A. 3.1 Agricultural, animal husbandry, and horticultural services 3.2 Agricultural machinery and equipment leasing 3.3 Veterinary services 3.4 Transport of farm products 3.5 Cooperatives 3.6 Others (specify) A.4 Fishery A. 4.1 Ocean (offshore) and coastal fishing 4.2 Inland fishing 4.3 Fish farms operation 4.4 Other fishery operations (specify) A.5 Forestry A. 5.1 Logging operation 5.2 Other forestry operations (specify) A.6 Hunting, Trapping and Game Propagation A. 6.1 Hunting, trapping and game propagation A.7 Metallic Ore Mining A. 7.1 Gold ore mining 7.2 Other precious metal ore mining (specify) 7.3 Copper ore mining 7.4 Nickel ore mining 7.5 Chromite ore mining 7.6 Iron ore mining 7.7 Other base metal ore mining (specify) A.8 Nonmetallic Mining and Quarrying A. 8.1 Coal mining 8.2 Crude petroleum and natural gas exploration and production 8.3 Stone quarrying, clay and sand pits 8.4 Other nonmetallic mining and quarrying B. FRANCHISE & MISCELLANEOUS TAXES DIVISION B.1 Electricity B. 1.1 Generating and distributing electricity 1.2 Distributing electricity to consumers B.2 Gas and Steam B. 2.1 Gas manufacture and distribution through systems 2.2 Steam heat and power plants B.3 Waterworks and Supply B. 3.1 Waterworks and supply B.4 Communications B. 4.1 Mail and express service 4.2 Telephone service 4.3 Telegraph service 4.4 Communications service B.5 Wholesale Trade B. 5.1 Farm, forest and marine products wholesaling 5.2 Processed food, beverage and tobacco products wholesaling 5.3 Dry goods, textiles, and wearing apparel wholesaling 5.4 Construction materials and supplies wholesaling 5.5 Office & household furniture furnishing, appliances & wares wholesaling 5.6 Machinery and equipment including transport equipment dealing 5.7 Minerals, metals and industrial chemicals (except crude petroleum and petroleum products) dealing 5.8 Petroleum and petroleum products wholesaling 5.9 Wholesale trade not elsewhere classified (specify) B.6 Retail Trade B. 6.1 Books, office and school supplies, newspapers and magazines retailing 6.2 Food, beverages and tobacco retailing 6.3 Dry goods, textile and wearing apparel retailing 6.4 Construction materials and supplies retailing 6.5 Office and household furniture, furnishings, fixtures, appliances and ware retailing 6.6 Transport machinery and equipment, accessories and supplies retailing 6.7 Medical supplies and equipment retailing 6.8 Petroleum and other fuel products retailing 6.9 Retail trade not elsewhere classified (specify) B.7 Sanitary and Similar Service B. 7.1 Sanitary and similar services B.8 Educational Services B. 8.1 Public education 8.2 Private education B.9 Medical, Dental, Other Health and Veterinary Services B. 9.1 Public medical, dental and other health services 9.2 Private medical, dental and other health services B.10 Other Social and Related Community Services B. 10.1 Research and scientific institutes 10.2 Social welfare services 10.3 Business, professional, civic, religious, and labor associations B.11 Recreational and Cultural Services B. 11.1 Motion picture and other entertainment services 11.2 Amusement and recreational services B.12 Personal and Household Services B. 12.1 Repair of motor vehicles and motorcycles 12.2 Other repair services (specify) 12.3 Laundries, laundry services, and cleaning and drying plants 12.4 Domestic services cd 12.5 Barber shops and beauty shops 12.6 Photographic studios, including commercial photography and related services 12.7 Personal services not elsewhere classified aisa dc C. CONSTRUCTION, TRANSPORTATION & SERVICE INDUSTRY DIVISION C.1 Construction C. 1.1 General building construction 1.2 General engineering construction 1.3 Specialized trade construction C.2 Transport Services C. 2.1 Railway transport 2.2 Road passenger transport 2.3 Water transport 2.4 Air transport 2.5 Services allied to transport (specify) C.3 Storage and Warehousing C. 3.1 Storage and warehousing (specify) C.4 Business Services C. 4.1 Professional business services C. 4.11 Legal services 4.12 Accounting, auditing and bookkeeping services 4.13 Engineering, architectural and technical services 4.14 Land surveying services 4.15 Market research services 4.16 Management consultancy 4.2 Advertising services 4.3 Machinery and equipment renting and leasing 4.4 Hotel, restaurant and catering services 4.5 Other business services (specify) D. BANKS, FINANCING & INSURANCE DIVISION D.1 Banking Institutions D. 1.1 Deposit money banks 1.2 Thrift banks 1.3 Other banking institutions (specify) D.2 Financial Intermediaries (Non-Banks) D. 2.1 Financial intermediaries (non-banks except pawnshops) D. 2.11 Investment company 2.12 Financing company 2.13 Investment house 2.14 Securities dealers/brokers 2.15 Fund managers 2.16 Mutual building and loan association 2.17 Nonstock savings and loan association D. 2.2 Pawnshops 2.3 Insurance agents and brokers 2.4 Other financial services (specify) D.3 Insurance D. 3.1 Life insurance companies 3.2 Non-life insurance companies 3.3 Other insurance activities (specify) E. MANUFACTURING DIVISION I E.1 Manufacture of Food and Beverages E. 1.1 Meat and meat products manufacture 1.2 Fish and fish products manufacture 1.3 Seafoods manufacture 1.4 Dairy products manufacture 1.5 Fruit and vegetable processing 1.6 Manufacture of coconut oil, vegetable oils and fats 1.7 Coconut, rice, and corn milling 1.8 Sugar milling and refinery 1.9 Manufacture of bakery products 1.10 Other food manufacturing (specify) 1.11 Beer, liquor and spirits manufacture 1.12 Soft drinks and other carbonated drinks manufacture 1.13 Other beverages manufacture (specify) E.2 Manufacture of Chemicals and Chemical Products, Rubber & Plastic Products E. 2.1 Manufacture of Industrial chemicals 2.2 Manufacture of other chemical products (specify) 2.3 Manufacture or rubber products 2.4 Manufacture of plastic products E.3 Exclusive wholesale distributors of the above manufacturers . F. MANUFACTURING DIVISION II F.1 Textile, Wearing Apparel, and Leather Industries F. 1.1 Textile manufacture 1.2 Manufacture of wearing apparel (except footwear) 1.3 Manufacture of leather and leather products, leather substitutes products, and fur products (except footwear and wearing apparel) 1.4 Manufacture of footwear (except rubber, plastic, or wood footwear) F.2 Basic Metal Industries F. 2.1 Iron and steel basic industries 2.2 Nonferrous metal basic industries 2.3 Manufacture of machinery (except electrical) 2.4 Manufacture of electrical machinery, apparatus, appliances, and supplies 2.5 Manufacture of transport equipment 2.6 Manufacture of professions and scientific, measuring, and controlling equipment not elsewhere classified, and of photographic and optical instruments F.3 Other Manufacturing Industries F. 3.1 Other manufacturing industries (specify) F.4 Exclusive wholesale distributors of the above manufacturers . G. GOVERNMENT AND TAX-EXEMPT CORPORATIONS DIVISION G.1 Tax-free private organization under Section 27 of the Tax Code and under Special Laws, such as but not limited to rural banks, cottage industries, and cooperatives. G.2 Government corporations, including government owned or controlled financial institutions. H. REAL ESTATE AND TRANSFER TAXES DIVISION H.1. Real Estate H. 1.1 Real estate development companies 1.2 Letting and operating real estate, residential and nonresidential 1.3 Transfer of property by donation or under succession laws. I. INTERNATIONAL OPERATIONS DIVISION I.1. International carriers. 2 Local branches or permanent establishments of foreign enterprises. 3 Overseas contractors, subject to the criteria prescribed in the Revenue Memorandum Order. 4 Multinational corporations to be assigned by the Revenue Service Chief, Sector Operations Office 5 The International Operations Division shall have primary audit jurisdiction over International Carriers 6 Under the Coordinated Examination Program prescribed in Revenue Memorandum Order No. 31-83, the International Operations Division shall conduct joint and concurrent examination and will undertake functional audit of cases involving - I. 6.1 Overseas contracts 6.2 Application of tax treaties 6.3 Determination of transfer pricing J. INVESTMENT INCENTIVES DIVISION J.1 Members of the Progressive Car Manufacturing Program and their distributors 2. The Revenue Service Chief, Sector Operations Office, may assign tax returns of taxpayers not enjoying incentives for primary audit by the Investment Incentives Division examiners. 3. Functional audit under the Coordinated Examination Program as prescribed in Revenue Memorandum Order No. 31-83. 4. Application of the alternate criteria . In situations where the primary criteria will not adequately serve as a means of determining which audit division shall have primary audit jurisdiction over the taxpayer, the following alternative criteria shall be used singly or in combination. 4.1 The predominant line-of-industry test . If a taxpayer is engaged in different lines of business or industry which come under two or more audit divisions, the predominant line-of-business or industry shall determine which audit division will have the primary audit jurisdiction. A line of business or industry which yields the highest percentage of gross sales or receipts from all lines of industry engaged in by the taxpayer shall be considered predominant for purposes of assigning a tax return subject to the relevant audit division. For example, an income tax return of a corporation shows gross sales derived from the following sources: Product Line Amount % to Total Meat and meat products manufacture P600,000 50% Livestock & livestock products production 400,000 33% Veterinary services 200,000 17% TOTAL GROSS SALES P1,200,000 100% ======== ==== Under the primary criteria, three divisions might claim primary audit jurisdiction over the taxpayer: Manufacturing Division II for the meat and meat products line; Agriculture & Natural Resources Division for the Livestock and livestock product line; and, Construction, Transportation, Services and Industry Division for the veterinary services. When conflict of jurisdiction arises as in this example, the alternative criteria - the predominant line-of-industry test - should be applied to resolve the conflict by assigning the case to the Manufacturing Division II because the meat and product line yielded the highest percentage of total gross sales from all lines of industry engaged in by the taxpayer. 4.2 The final-product test . If a taxpayer is engaged in a line of industry which involves primary, intermediate and other auxiliary to the main operation leading to the manufacture of a final product, the taxpayer shall be assigned to the corresponding audit division according to the classification of the final product. For example, if a corporation is engaged in business of meat packing, meat processing and meat canning and at the same time undertakes livestock production as a source of its raw materials, by applying the final-product test, the corporation will come under the jurisdiction of the Manufacturing Division II and not under the agriculture and Natural Resources Division. acd Effectivity. This Order shall apply to tax returns for taxable years beginning in 1983 and which are listed under the jurisdiction of the National Office. RUBEN B. ANCHETA Acting Commissioner