[Ask the Tax Whiz] Why am I subjected to a VAT audit aside from a regular audit?

What are the selection criteria of the Bureau of Internal Revenue (BIR) for an issue-based audit? What is the coverage of this audit?

Taxpayers with value-added tax (VAT) returns reflecting erroneous input tax carry-over are mandatorily selected for investigation.

The following taxpayers, meanwhile, are selected as priority cases for a VAT audit:

1. Taxpayers whose VAT compliance is below the established industry benchmarks
2. Taxpayers with zero-rated and/or exempt sales due to availment of tax incentives or exemptions
3. 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 a substantial amount of input tax, such as restaurants, remittance/payment centers, etc.
4. Taxpayers with VATable transactions which were subjected to expanded withholding tax but with no VAT remittance (based on BIR Form Nos. 2550Q and 1604)
5. Taxpayers who failed to remit/declare VAT due from purchase of services from non-resident aliens
6. 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
7. Taxpayers whose gross sales/receipts per income tax returns are greater than gross sales/receipts declared per VAT returns 
8. Taxpayers filing percentage tax returns whose gross sales/receipts exceed the VAT threshold

For the issue-based VAT audit, one electronic letter of authority (eLA) shall be issued for each taxable quarter, or for two quarters if recommended by the VAT audit section chief.

Moreover, claims for issuance of tax credit certificates/refunds and VAT returns selected for audit by the National Investigation Division under the Enforcement and Advocacy Service and by the Regional Investigation Division of the revenue regional offices shall be excluded from the VAT audit.

I received a VAT letter of authority covering the third and fourth quarters of the taxable year 2020. If I get selected under the regular audit by the BIR during the same taxable year, will the audit and investigation include VAT assessment?

If the taxpayer becomes a candidate for a regular audit in the revenue district office (RDO) under the annual audit program, as long as there is an issued eLA for VAT audit, it is to be excluded from the regular audit and investigation of the BIR.

The head of the VAT audit team should transmit a copy of the VAT audit findings to the RDO conducting the regular audit to determine their relevance and effect on other tax liabilities.

If I’m being audited under the issue-based audit, what would be the worst-case scenario for my business? Can the BIR close my business?

The VAT audit section chief may recommend surveillance, closure, or other measures against the taxpayer based on the audit findings or violations uncovered during the audit. 

If there are findings on VAT that may impact the income tax aspect, such findings shall be communicated by the assessment division chief to the concerned investigating office. The head of the investigating office is required to submit to the assessment division chief a written memorandum as to the action taken on these findings.

Don’t wait for the BIR to run after you or your company for violations of the tax code. Get an Annual Tax Health Check now by emailing us at consult@acg.ph or calling +639063159230. Join the Executive Tax Management Program of the Asian Consulting Group to manage your taxes without stress and unnecessary penalties, interest, and compromises. Register now through this link or visit www.acg.ph or more information.

– Rappler.com

Mon Abrea, CPA, MBA, is the co-chair of the Paying Taxes-EODB Task Force. With the TaxWhizPH mobile app as his brainchild, he was recognized as one of the Outstanding Young Persons of the World, an Asia CEO Young Leader, and one of the Ten Outstanding Young Men of the Philippines because of his tax advocacy and expertise. Currently, he is the chairman and CEO of the Asian Consulting Group and trustee of the Center for Strategic Reforms of the Philippines – the advocacy partner of the Bureau of Internal Revenue, Department of Trade and Industry, and Anti-Red Tape Authority on ease of doing business and tax reform. Visit www.acg.ph for more information or email him at mon@acg.ph and download the TaxWhizPH app for free if you have tax questions.