Value-added audit of VAT tax returns

For the past years, the tax collection statistics from the Bureau of Internal Revenue (BIR) show that the collection of value-added tax (VAT) has been increasing. 

In its aggressive effort to continuously increase its VAT collection, the BIR has recently issued Revenue Memorandum Order (RMO) No. 16-2014 which reiterates the specific policies regarding the scope of the audit and submission of reports of investigation under the VAT audit program of the BIR.  The RMO also prescribes the minimum number of audit cases to be reported or closed by each of the members of the VAT audit teams under Revenue Region Nos. 5-Caloocan, 6-Manila (excluding some revenue district offices), 7-Quezon City and 8-Makati City.

In retrospect, RMO No. 20-2012, as the “mother” tax issuance of RMO No. 16-2014, introduced the 2012 VAT audit program with the objective of increasing collection and enhancing voluntary compliance by focusing on quality audit of VAT returns. 

Initially, the VAT audit program would be implemented with pilot roll-out in September 2012 in the above-mentioned revenue regions. A VAT audit team would be created in each revenue region which has the responsibility of investigating VAT returns.  Subsequently, this program will be rolled out to other regional offices upon notification.

In order to determine which taxpayers will be subjected to the VAT audit program, RMO No. 20-2012 enumerates the selection criteria such as the following: taxpayers whose VAT compliance is below the established industry benchmarks; taxpayers whose VAT returns for the next quarters show a substantial decrease in tax payment; taxpayers whose VAT returns reflect substantial input taxes from importations and local purchases; taxpayers with no VAT return filed in any quarter of 2011; taxpayers who are filing “No Operations” returns; taxpayers with a history of declaring excess input tax carry over for all the quarters of 2011; taxpayers who did not submit their Summary List of Sales or Purchases for any quarter of 2011; taxpayers with substantial sales but showing net loss; taxpayers identified to have significant under-declaration of sales; taxpayers filing exempt VAT returns due to availment of tax incentives; and other taxpayers selected by the head of the VAT audit team as approved by the regional director.

By way of exception, the following VAT returns are excluded from the scope of the VAT audit program: tax credit or refund claims for the reason that these claims are already subject to the mandatory audit conducted by the BIR; and VAT returns selected for audit by the National Investigation Division of the BIR National Office and by the Special Investigation Division of the revenue regional offices.

Once the VAT returns have been investigated by the members of the VAT audit team, the VAT audit head must prepare a list of selected taxpayers for VAT audit based on the selection criteria and submit the list to the regional director for approval. If it is determined that there is compliance with the prescribed criteria, an electronic Letter of Authority (eLA) will be issued to the taxpayer concerned that authorizes or empowers a designated revenue officer (RO) to examine, verify and scrutinize a taxpayer’s books of accounts and records in relation to his internal revenue tax liabilities, which in this case is the possible deficiency VAT liability, for a particular taxable period.

Previously, the initial workload of each RO under the 2012 VAT audit program should be 20 cases as prescribed under RMO No. 20-2012.  However, in order to maximize the capability and full potential of each RO in the VAT audit team, RMO No. 16-2014 mandates that the minimum number of audit cases that must be completed/reported by each RO per year is 30 cases.  Thus, if the number of ROs assigned in the VAT audit team is 20, the VAT audit team must be able to report at least 600 cases in the year 2014.

In the investigation of VAT returns, the basic audit procedures under Revenue Audit Memorandum Order No. 1-99 applicable to the risks identified for case selection and as a result of pre-audit analysis must be strictly adhered to.  Also, an audit plan must be prepared and completed for each case.  Further, only the documentary requirements prescribed under RMO No. 53-98 that are applicable and relevant to the audit case must be attached to the docket.

In case there are deficiency VAT liabilities as a result of the audit, the issuance of a Preliminary Assessment Notice (PAN) under existing tax regulations is in order.

RMO No. 16-2014 reiterates that reports of investigation on VAT audit cases covering one quarter or two quarters must be submitted within 60 days or 90 days, respectively, from the date of issuance of the eLA.  If the RO cannot submit the report of investigation within the prescribed audit period, he must prepare a progress report stating the reason for the delay.

The detailed process of the 2012 VAT audit program, as reiterated in RMO No. 16-2014, shows how determined the BIR is in increasing its VAT collection,  particularly from those taxpayers identified  based on the selection criteria. With almost half of the year gone, ROs of the VAT audit team may be expected to work double time to meet the requirement of 30 cases per year.  This underscores the importance of being prepared for VAT audits as taxpayers can expect more VAT audits, surveillance, closure or other VAT enforcement activity by the BIR.

Maria Ofelia B. Galura is an assistant manager from the tax group of R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or RGM&Co. For comments or inquiries, please email [email protected] or [email protected].

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