Joint and Coordinated Examination of Interrelated Taxpayers for Taxable Year 1997 and Uninvestigated Prior Years

July 7, 1998 REVENUE MEMORANDUM ORDER NO. 61-98 SUBJECT : Joint and Coordinated Examination of Interrelated Taxpayers for Taxable Year 1997 and Uninvestigated Prior Years TO : All Revenue Officers Concerned 1. OBJECTIVE In view of the remarkable decrease in tax collection from large taxpayers and their controlled group of companies, there is a need to conduct a joint and coordinated audit of these taxpayers and their related entities in order to: 1.1 ensure that taxpayers clearly reflect income attributable to controlled transactions and to prevent the avoidance of taxes with respect to such transactions; 1.2 provide rules for the determination of the true taxable income of controlled taxpayers in specific transactions such as inter-company loans and advances, cost-sharing, resale and agency arrangements and the supply of goods and services between related parties; and 1.3 identify the tax avoidance schemes used by controlled corporations including the use of tax exempt entities or entities with special tax privileges to reduce taxable income, and to provide rules and regulations for the prevention of such schemes. 2. GUIDELINES 2.1 Identification of Taxpayers Covered . The Commissioner shall, within 10 days from issuance of this RMO, identify the large taxpayers and their related group of companies that will be subject to audit under this program; 2.2 Creation of Audit Team . The Commissioner shall likewise create a group composed of Revenue Officers with substantial exposure in the audit of large taxpayers and inter-company transactions to undertake the audit of taxpayers identified in 2.1. It shall be headed by a Coordinator reporting directly to the Commissioner. 2.3 Coverage . The investigation shall cover all internal revenue taxes for taxable year 1997 and uninvestigated prior years. 2.4 Letter of Authority (LA) , ATAP and Assessment Notices . All Letters of Authority (LA) and Assessment Notices (AN) issued under this program shall be signed by the Commissioner. However, Authority to Accept Payment (ATAP), may be signed by the Assistant Commissioner for Enforcement Service. LLphil 2.5 LA ' s issued prior to this Order . Revenue District Officers shall refrain from issuing Letters of Authority (LA) and conducting an investigation of taxpayers covered under this program. All LA's for taxable year 1997 which were issued prior to this Order pursuant to the 1998 Audit Program under RMO Nos. 12-98 & 27-96 shall be cancelled provided that the investigation thereof has not yet been completed. For completed cases, the corresponding reports of investigation shall be forwarded to the Office of the Commissioner for purposes of establishing benchmarks and for gathering information necessary in the formulation of guidelines and procedures for related parties; 2.6 Completion Date . All investigation shall be completed and the reports of investigation submitted not later than six (6) months from the issuance of a Revenue Special Order (RSO) for the creation of the Audit Team under Section 2.2. 2.7 Revenue Audit Memorandum Order (RAMO) . Within 15 days from date of completion, the Audit Team, through the Coordinator, shall submit to the Commissioner a recommendation of the guidelines, standards and procedures to be adopted in the audit of related parties and inter-company transactions. This shall include: a. identification of tax avoidance schemes of related parties; b. tax treatment for controlled transactions including the cost-sharing arrangements, inter-company loans and advances, provision of goods and services, agency or resale arrangements and etc.; c. audit procedures for related-party transactions. 3. PROCEDURES 3.1 Tax Returns to be transmitted to the Office of Commissioner . Upon identification by the Commissioner of the taxpayers covered under this program, all Revenue District Officers through the Regional Director shall transmit within 15 days to the Office of the Commissioner all income, VAT, percentage, withholding and other tax returns of these taxpayers. 3.2 Assignment of LA . LA's shall then be issued and assigned to the Audit Team created under Section 2.2. The Audit Team shall be divided into groups, each headed by a Group Head. Each group shall be assigned at least two (2) groups of interrelated taxpayers including the principal stockholders. Taxpayers belonging to the same group of related companies shall be assigned to a specified audit group who will undertake a simultaneous, joint and coordinated examination of the books of accounts. LibLex 3.3 Related-party Audit Procedures . Verification shall generally follow the normal audit procedures prescribed in the Audit Manual. In addition, other special procedures peculiar in related-party audit and which are necessary to clearly reflect the true taxable income of controlled entities shall be followed. For this purpose, workshops on the audit of inter-company transactions and tax avoidance schemes of related entities shall be regularly conducted to enhance the skills of the Audit Team. 3.4 Submission of Monthly Progress Reports . Each Group, through their respective Group Heads, shall submit to the Coordinator a progress report not later than the 5 th day of every month until completion of the project. All progress reports shall be consolidated and summarized by the Coordinator for inclusion in a monthly report to be submitted to the Commissioner. 3.5 Conference Letter . All preliminary findings shall be reviewed by the Coordinator before any Conference Letter is issued to taxpayer to inform him of the nature of the findings. Conferences for interrelated group of taxpayers shall be conducted simultaneously unless there are justifiable reasons to make it separate. 3.6 Final Reports of Investigation . Final reports of investigation shall be approved by the Commissioner who shall issue the necessary AN covering deficiency taxes. All AN remaining unpaid after the due date for payment specified in the AN shall be transmitted for collection to the Revenue Region having jurisdiction of the taxpayer within 15 days from delinquency. 3.7 Report of Project Completion . A final report of project completion shall be submitted by the Coordinator to the Commissioner indicating therein the procedures undertaken, total amount of collection and assessment, the issues identified and the recommended audit guidelines and procedures for related-party audit. IV EFFECTIVITY This Order shall take effect immediately. BEETHOVEN L . RUALO Commissioner of Internal Revenue