“Oplan Kandado: Are drastic measure justifiable?” by Vicki A. Ballesteros (January 18, 2010)

SUITS THE C-SUITE By Vicki A. Ballesteros
Business World (01/18/2010)

You may have noticed recently a familiar restaurant, grocery or corner drug store suddenly closed for business, its doors chained and padlocked, with a sign that reads: “Closed by the BIR pursuant to Oplan Kandado.”

This has become a daily occurrence across the country on the strength of Revenue Memorandum Order No. 3-09, which the Bureau of Internal Revenue (BIR) issued on Jan. 15, 2009. It has also been supplemented by Revenue Memorandum Order No. 43-2009 issued on Dec. 4, 2009.

While some of the guidelines on the temporary closure of business are new, the basics have been around since the inception of the Tax Code itself.

Considering the present economic crunch, it is not surprising that the BIR is exerting extra effort to boost collections, invoking provisions that give the BIR Commissioner the power to suspend the business operations of an erring taxpayer.

With such increased efforts in the enforcement and collection of taxes, it becomes incumbent upon businesses to be on guard and compliant at all times.

Oplan Kandado bears down specifically on taxpayers who are remiss in reporting and paying their value-added tax (VAT) liabilities. Although VAT as an indirect tax may be passed on from one party to the other, some still consider VAT a huge burden because of its impact on cash flow and consequently on prices, making business more competitive and difficult. The importance of VAT during these times should not be ignored and needs to be paid regardless of the company’s profitability.

Aside from strictly enforcing collections and promoting voluntary compliance, Oplan Kandado aims to educate and inform taxpayers on the importance of complying with the VAT regulations.

Under what conditions, then, can a business establishment be padlocked by the BIR?

Specifically, the only grounds for the temporary closure of business are:

»failure to issue receipts or invoices by a VAT-registered or registrable taxpayer;

»failure to file a VAT return;

»understatement of taxable sales or receipts by 30% or more of the correct amount thereof in the case of a VAT-registered or registrable taxpayer; or

»failure to register as a VAT taxpayer.

Through covert and overt surveillance (required to be covered by duly executed Mission Orders), the BIR can observe the volume and magnitude of business transactions of an establishment, as well as its procedure in documenting such transactions through invoices or official receipts. Revenue officers conducting covert surveillance may pose as customers or mere onlookers. Third party information may also be gathered in order to check if the taxpayer is correctly reporting its sales. After gathering the preliminary data, an overt surveillance is conducted, whereby the revenue officers request for the books of accounts, invoicing records, and inspect cash register machines where applicable, in order to determine the accuracy of information disclosed in the VAT returns of the taxpayer. Overt surveillance can take 10-30 days and may even be extended.

Based on findings from the surveillance operations, the BIR prepares a report, which may or may not recommend the closure of the business establishment. This report is then presented to the taxpayer, who is given 48 hours to explain, in a notarized document, why the business should not be closed temporarily. Upon the taxpayer’s submission of the explanation, or if none is submitted within 48 hours, the BIR will decide whether or not to terminate the case.

In the event that the BIR decides to pursue the case, a five-day VAT Compliance Notice (VCN) is served upon the taxpayer, providing details on what he or she needs to submit and how much in assessed taxes needs to be paid.

To refute these findings, the taxpayer should submit a response within two days from receiving the VCN. Otherwise, the taxpayer must comply and pay the taxes assessed within the five-day period.

If the taxpayer is unable to do either, the BIR will prepare and execute the Closure Order, including physically sealing the entrance to the establishment with padlocks and putting the BIR signage by the entrance. This may then get unwanted publicity when the closure is picked-up and covered by the media.

For at least five days, the closure will be in force until the taxpayer rectifies the alleged violations, and only then can he or she resume operations.

In some cases, immediate or partial compliance may be considered sufficient basis to lift the closure. In the process, the taxpayer can still amend his or her returns for other taxes, and may still be audited for other taxes in the future.

Once the Closure Order is lifted, the BIR will continue to monitor tax payments. If the taxpayer commits the same violations previously penalized, the BIR can initiate proceedings to impose administrative and criminal penalties under the Run After Tax Evaders program.

More than the financial aspect of not being able to run the business for several days, taxpayers who are found to violate VAT reporting and payment requirements, and who cannot justify their tax records, must deal with the stigma of having been found non-compliant and shut down by the BIR.

Moreover, the impact on the business may truly be significant, as regular patrons and customers may dwindle due to lingering questions on the legitimacy on the transactions.

Oplan Kandado may be drastic, but it has become a centerpiece of the BIR’s active campaign to increase revenues because our tax administrators realize that the urgency for collections may well warrant compelling compliance at all costs.
(The author is a tax senior director at SGV & Co.)

This article was originally published in the BusinessWorld newspaper. It 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.