SUITS THE C-SUITE By Saha P.

Adlawan-Bulagsak
Business World (10/31/2016 – p.S1/4)
The new leadership of the Bureau of Internal Revenue (BIR) continues to firm up its tax collection
strategies in order to help the bureau achieve its collection target for 2016 of P1.6 trillion
(reduced from P2 trillion), with less than three months before the year closes.

The BIR recently announced that attaining its collection targets will be one of its priorities and
value-added tax (VAT) is clearly at the top of its agen da, given that this has been seen as a big
source of tax leakage. Very recently, the BIR released Revenue Memorandum Order (RMO) No. 59 -
2016 dated Sept. 19 mandating an issue -based audit under the Value -Added Tax Audit Program
(VAP).

The issue-based VAT audit expands the existing regular VAP, which the BIR has been conducting
under RMO No. 20-2012 dated Aug. 3, 2012, and will cover the audit/investigation of VAT liabilities
of VAT taxpayers for taxable quarters of 2015 and onwards.

Although the VAT Audit Pr ogram has been in place since 2012, the new RMO aims to increase the
audit coverage of VAT -registered taxpayers, as well as enhance the focus and efficiency of VAT
audits. With RMO No. 59 -2016, it appears that the BIR will also be concentrating more on
taxpayers with substantial tax consequences and those with possible high deficiency tax yields in
order to achieve greater efficiency in its tax audits.

Taxpayers will now have to be extra careful in ensuring that their quarterly VAT returns reflect the
correct amount of excess input tax carried over from previous quarters; otherwise, they may be
subjected to a mandatory VAT audit by the BIR.

Further, it is now even more important for taxpayers to submit consistent data and figures in their
tax returns (e.g., revenues and receipts reported in the income tax returns as against the amounts
declared in the VAT returns) and in their counterpart suppliers/customers (e.g., purchases subject
to withholding tax by customers against the sellers’ revenues/receipts report ed in VAT returns)
because the following selection criteria are now included in the priority cases for VAT audit:

· Taxpayers with VATable transactions which were subjected to expanded withholding tax but with
no VAT remittance (based on BIR Form Nos. 2550 Q and 1604);
· Taxpayers whose gross sales/receipts per income tax returns are greater than gross
sales/receipts declared per VAT returns;
· Taxpayers who failed to remit/declare VAT due from purchase of services from non -resident
aliens (based on BIR Form Nos. 2550Q and 1600);
· Taxpayers who fail to declare gross sales/receipts subjected to VAT withholding on purchases of
goods/services with waiver of privilege to claim input tax credit (based on BIR Form Nos. 2550Q
and 1600).

BIR examiners have already b een undertaking these reconciliation procedures as part of their
regular audit or investigation, and any corresponding discrepancies noted are normally included in
their tax assessments. However, including these issues among the selection criteria for prio rity
VAT audit encourages taxpayers to revisit their books and tax returns to ensure that their existing
tax-related processes are able to flag these issues and to anticipate and mitigate the tax risks
associated with these issues.

VAT audits under the VAP can be conducted on a quarterly basis. Therefore, taxpayers should not
wait until yearend to resolve any potential VAT issues which could lead to their being included
among companies to undergo a priority VAT audit. It is crucial that taxpayers have inter nal
policies and procedures in place to help identify and address in a timely manner any tax issues,
VAT in particular. Since the BIR is stepping up its efforts to meet collection targets, taxpayers
need to be aware that BIR examiners may tend to become mo re stringent and meticulous in
conducting detailed issue -based VAT audits.

Also included in the priority cases under this RMO are the following taxpayers:
· Taxpayers engaged in business where 80%, more or less, of their transactions are on a cash
basis and whose purchases of goods and services do not generate substantial amount input tax,
such as restaurants, remittance/payments centers, etc.
· Taxpayers filing percentage tax returns whose gross sales/receipts exceed the VAT threshold

The above criteria fo cus on taxpayers with relatively low levels or nil amounts of input VAT.
Hence, if found to have deficiency output VAT on their sales/receipts, the above taxpayers will
likely end up with substantial VAT liabilities, plus penalties for having minimal VAT i nput credits to
cushion the additional output VAT liability. Take, for instance, taxpayers filing percentage tax
returns but whose gross sales/receipts exceed the VAT exemption threshold. Under the VAT rules,
taxpayers who become liable for VAT but who are not registered as VAT taxpayers will be liable for
output VAT payments as if they were VAT -registered persons, but without the benefit of input VAT
credit for the period in which they were not properly registered.

On the other hand, taxpayers entitled to VAT zero-rating and/or VAT exemption of their sales or
receipts and are supposedly enjoying tax incentives should not be complacent as they may also be
tagged as priority cases for VAT audit. We should note that tax exemptions are strictly construed
against the taxpayer because an exemption restricts the collection of taxes. Thus, there is even
more reason for taxpayers entitled to VAT zero -rating/exemption to be more prudent as
noncompliance with the requirements for availing VAT incentives may result in s ubstantial amount
of deficiency VAT assessment plus penalties.

Given that this issue-based VAT audit covers the taxable quarters of 2015 and the BIR is still well
behind its collection goal for 2016, it is possible that notices for VAT audit may be release d
anytime soon. We reiterate that it is vital for taxpayers to proactively assess whether their returns
comply with existing VAT rules and requirements and, moving forward, to make comprehensive
VAT compliance an integral part of their tax reporting activi ties.

VAT reform is an important facet of the government’s larger tax policy reform program. The BIR’s
latest VAT audit program may well be part of its efforts to manage “large leakages” in the tax
system. By initiating its own VAT audit program, the curre nt BIR administration sends a clear
message that fostering inclusive growth requires higher tax revenues.

This article is for general information only and is not a substitute for professional advice where
the facts and circumstances warrant. The views and opinion expressed above are those of the
author and do not necessarily represent the views of SGV & Co.