Brace yourselves for more VAT audits

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 agenda, 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 Program 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 reported 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. 2550Q 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 been 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 priority 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 internal 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 more 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 focus 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 input 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 substantial 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 released 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 activities.

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 current 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.

Saha P. Adlawan-Bulagsak is a Tax Partner of SGV & Co.