VAT compliance

By Edward M. Menor

First Published in Business World (7/8/2013)

TAX collections from large taxpayers account for around 64% of the total annual tax take of the Bureau of Internal Revenue, and the BIR will likely continue to rely heavily on the contributions of large taxpayers to its collection goal.

Thus, it is observed that there has been a renewed effort on the part of BIR to enforce our Value-Added Tax law. The VAT Audit Program for Large taxpayers, introduced under Revenue Memorandum Order No. 19-2012, aims to enhance large taxpayers’ voluntary compliance through a quality audit of VAT declarations/returns of taxpayers who are selected using the criteria provided in the RMO. They are then classified as either high-risk or medium-risk.

High-risk taxpayers include those who under-report their VAT liabilities and who fail to remit their VAT collections. Taxpayers are considered to have under-reported their VAT liabilities and failed to remit their VAT collections if:

• There has been a significant increase in exempt/zero-rated sales/revenues;

• The VAT returns reflect substantial input taxes (i.e., total input taxes claimed exceed 75% of the total output tax);

• There has been a history of declaring excess input tax carry-over;

• VAT-exempt returns are being filed due to the availment of tax incentives or tax exemptions;

• There has been a history of filing claims for refunds and/or requests for issuance of a Tax Credit Certificate (TCC);

• They have substantial sales, yet they report a net loss;

• There has been a drastic decrease in reported sales / VAT payments, or a have marked deviation from industry trends; and

• They are identified as high-risk based on the results of the LTS Compliance Risk Matrix analysis.
On the other hand, taxpayers are considered to be medium-risk if they have industry issues and if there are changes in status/registration of their businesses. Medium-risk taxpayers include:

• Taxpayers with complex corporate structures, including mergers/consolidations/split-up or -down/spin-offs and other types of corporate reorganizations;

• Taxpayers with application for cessation/retirement of business;

• Taxpayers with multiple branches/outlets all over the Philippines but who reported low sales;

• Taxpayers with sale or transfer of business; and

• Taxpayers with multiple lines of business with different basis for computation of VAT liabilities.
In addition to the VAT Audit Program for large taxpayers, the BIR also issued RMO No. 20-2012 to implement the pilot roll-out of the VAT Audit Program for VAT taxpayers other than large taxpayers within Metro Manila. The following selection criteria are used to determine taxpayers who will be part of the VAT Audit Program:

• Those whose VAT compliance is below the established 2010 or 2011 industry benchmarks, whichever are available;

• Those whose VAT returns for the succeeding quarters show a substantial decrease in tax payment;

• Those whose VAT returns reflect substantial input taxes from importations and local purchases, such as when the total purchases claimed exceed 75% of the total sales;

• Those with no VAT returns filed in any quarter or all of the quarters in 2011;

• Those who are reporting/filing “No Operations” Returns;

• Those with a history of declaring excess input tax carry-over for all the quarters of 2011;

• Those who have not submitted their Summary List of Sales or Summary List of Purchases for any of the quarters of 2011;

• Those with substantial sales but showing net loss;

• Those identified to have significant under-declaration of sales as a result of the Tax Compliance Verification Drive and/or other programs of the Bureau;

• Those filing VAT-exempt returns due to the availment of tax incentives or tax exemptions; and

• Those selected by the VAT Audit Team, subject to approval by the Regional Director.
In both RMOs, one e-Letter of Authority (eLA) will be issued for each taxable quarter or semester by the Assistant Commissioner, Large Taxpayers Service and Regional Director, as the case may be, upon the recommendation of the VAT Audit Team Heads.

If an eLA has already been issued to the taxpayer for all internal revenue taxes and a significant finding on VAT was uncovered, it should be communicated to the VAT Audit Team Head. This means that the taxpayer will not be exempted from the VAT Audit Program even if there was already an examination of its books for all internal revenue taxes under a regular audit.

On the other hand, if there is already an eLA under the VAT Audit Program and the taxpayer becomes a candidate for a regular audit, the latter should not include an examination of VAT.

The BIR has consistently announced that it prefers an improvement in tax compliance over tax enforcement, to ensure a sustained revenue tax take for the government. As the VAT system has not yet attained its full potential, it is expected that it will remain a focal point in the BIR’s effort to improve tax administration.

Edward M. Menor is a senior tax director of SGV & Co.

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.