BIR Audit Program: A guide for taxpayers

It has been pronounced time and again that taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. But such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself.

In view of the above principle of taxation and in line with the Bureau of Internal Revenue (BIR)’s Strategic Plan for CY 2011-2016, the BIR has been continuously releasing numerous issuances to boost its strategies and programs – one of which is to achieve revenue collection targets and to strengthen the effectiveness of tax administration.

Recently, the BIR issued Revenue Memorandum Order (RMO) No. 19-2015 or the BIR Audit Program. This RMO prescribes the policies, guidelines and procedures to be observed in the audit/investigation of tax returns to enhance taxpayer’s voluntary compliance by encouraging the correct payment of internal revenue taxes.

These tax audits/investigations are being carried out according to the criteria/categories set out by the BIR. Although in general, all taxpayers are candidates for tax audit/investigation, RMO No. 19-2015 classified the taxpayers subject to tax audit/investigation, as follows: (1) Mandatory cases (2) Priority taxpayers/industries and (3) Other priority audit that may be identified by the regional director (RD)/asst. commissioner of Internal Revenue, Large Taxpayer Service (ACIR-LTS).

Some of the taxpayers covered by the BIR’s mandatory audit are those: (1) With request for tax clearance for purposes of merger/consolidation/split-up/spin-off and other types of corporate reorganizations. And (2) Those with claims for tax refund/credit or issuance of tax credit certificate.

On the other hand, those taxpayers who are categorized as priority taxpayers include: (1) Those enjoying tax exemptions/incentives (2) Those deriving its revenue/income exclusively or substantially from its parent company/subsidiaries/affiliates (3) Those with shared expenses and other interrelated charges being imputed by a parent company to its affiliates and likewise an affiliate to other affiliate in a conglomerate. And (4) Those with issue-oriented audits (e.g. transfer pricing (TP), Base Erosion and Profit Shifting [BEPS], etc.).

With respect to TP, early this year, the BIR issued Revenue Memorandum Circular (RMC) No. 3-2015 where TP is one of BIR’s CY 2015 priority programs. The BIR’s goal is to release issuances on TP, to wit: (1) Revenue Regulations (RR) on advance pricing agreements (APA) (2) RMO on TP documentation. And (3) RMO on TP Risk assessment.

It is worthy to note, however, the BIR has not yet taken concrete steps to enforce RR No. 02-2013, the first TP regulations. Further, issuance on the manner of implementation of TP audit is yet to be released. Be that as it may, notwithstanding the absence of guidelines or circulars to clarify matters relative to TP, it is but proper for the taxpayers to evaluate their TP compliance. At the very least, taxpayers should be proactive in assessing their TP risks through the preparation of TP documentation.

RMO  No. 19-2015 also provides that if the taxpayer has been audited for the last two years and has been again selected for audit on the current or 3rd year, the revenue district officer (RDO)/Large Taxpayers Division (LTD)/LT Audit Division (LTAD) shall submit a written explanation to the commissioner of Internal Revenue (CIR), copy furnished the deputy CIR-Operations Group (DCIR-OG) for regional cases, as to why such taxpayer shall be subjected to audit for three succeeding years, except in cases where the RDO/LTD/LTAD has established that such taxpayer has an under-declaration of sales/income or overstatement of expenses/deductions by at least 30 percent. These exceptional cases shall be considered prima facie evidence of fraud and deficiency assessment on these cases would be subject to 50 percent surcharge.

Another point stressed in this RMO is that the revenue officer (RO) should not require the taxpayer to submit tax returns and other information which can be retrieved within the BIR.

It was likewise stated in RMO No. 19-2015 that the simultaneous investigation of all liabilities of the taxpayers shall be observed. One (1) electronic Letter of Authority (eLA) shall be issued for each taxable year or period to include all internal revenue tax liabilities of the taxpayer, except when a specific tax type had been previously examined.

In addition, the RMO made clear that if the taxpayer has been selected for regular audit and subsequently becomes a candidate under the value-added tax (VAT) audit program, significant findings on the audit of VAT should be communicated to the Chief – AD/Head, VAT audit team for possible risk identification in the current quarters. Furthermore, if an eLA has been issued under the VAT audit program and subsequently, the taxpayer becomes a candidate for regular audit in the RDO/LTD/LTAD based on the criteria provided under this RMO for the same taxable year, the request for eLA for regular audit shall not include the VAT liability, even if the eLA issued under the VAT audit program is for a particular taxable quarter only.

It was restated in this RMO the eLA shall be served to the taxpayer or his representative in accordance with Section 3.1.6 of RR No. 12-99 as amended by RR No. 18-2013 through (1) personal service; (2) substituted service; or (3) service by mail.

The RMO further specified the period within which the BIR examiner is required to submit a report of investigation/verification of cases being audited by him.

It can be gleaned the issuance of RMO 19-2015 is aligned with the BIR’s public awareness campaign to constantly educate taxpayers especially when it comes to tax audits/investigations.

As enunciated in a long line of cases, the power of taxation is essential to the very existence of the government. The government cannot exist nor endure without the means to pay its expenses; and for those means, the government has the right to compel all its citizens and property within its limits to contribute in the form of taxes. Despite the inevitability and indispensability of taxation, it is a requirement that such power be exercised reasonably and in accordance with the prescribed procedure.

Chandine Kaye P. Villegas is a supervisor from the tax group of R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International. RGM&Co. has been recognized as a Tier 1 tax practice, Tier 1 transfer pricing practice and Tier 1 leading tax transactional firm in the Philippines by the International Tax Review.

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].

For more information on KPMG in the Philippines, you may visit www.kpmg.com.ph.