ON UNDERRECORDED PURCHASES:

Court of Tax Appeals (CTA) in CTA Case No. 8345, dated May 29, 2013:

RULING:

A taxpayer is free to claim or not to claim deductions from gross income. That is a
taxpayer’s prerogative. Instead, what is prohibited by the law is to claim a deduction
beyond the authorized amount. Accordingly, an underdeclaration of purchases or
unaccounted expenses is not prohibited by law.

FACTS:

A domestic corporation was assessed for deficiency income tax and VAT on assumed
income based on the BIR’s findings that it had underdeclared purchases or unaccounted
expenses. The sole basis for the BIR’s tax assessments is the finding of underdeclaration of
purchases based on Third Party Information (TPI) matching programs. The TPI program involves
correlation of information provided by the taxpayer with those gathered from third parties, i.e.,
Reconciliation of Listing for Enforcement System (RELIEF), Tax Reconciliation System (TRS)
and Third Party Matching-Bureau of Customs (TPM-BOC) Data Program. Of particular interest
in this case is that no evidence was submitted showing that income resulted from the
unaccounted purchases/expenses and that income was actually received by the corporation.
The CTA considered the BIR assessment wanting in legal and factual basis. The court explained
that the tax finding was presumptive in nature, the BIR having assumed that the alleged
undeclared purchases are unaccounted expenses which would translate into income. Here lies
the misplaced notion that hidden or undeclared purchases are analogous to hidden income.

COMMENT:

The legal gaffe came in the form of a speculative assessment on under-declared income.
For a tax assessment to be valid and binding, there must be clear proof of realized
income, and such income was received by the taxpayer. An assessment based on mere
presumption of income from underdeclared purchases/unaccounted expenses is flawed and
ineffective. Such speculation runs afoul of the well-established elements for the imposition of
income tax, namely (a) that there must clear proof of gain or profit, (b) that such gain or profit
was received by the taxpayer, actually or constructively, and (c) that it is not exempted by law or
treaty from income tax. In the same vein, VAT can be imposed only if the taxpayer received an
amount of money from the sale or exchange of services -- not when there are under-declared.
 ON VALUE ADDED TAX:

Value Added Tax (VAT) is a form of sales tax. As such, it is based on gross receipts from
sale, barter, exchange, or lease of goods or properties and services within the Philippines. It is
also imposed on goods imported into the country. VAT is an indirect tax which means the end
consumer is being charged for the tax. In the Philippines, the rate of VAT is at 12% except for
export sales and other zero-rated sales which is at 0%.

Who Needs to Register as a VAT Taxpayer?

1. Any person or entity engaged in the business of selling goods or services that are subject to
VAT and whose annual gross sales or receipts exceed or are expected to exceed One Million
Nine Hundred Nineteen Thousand Five Hundred Pesos (Php1,919,500.00).

2. Any person or entity that is not VAT exempt but failed to register.

3. Any person or entity engaged in importation of goods.

MANDATORY AUDIT:

The foregoing new policies appear reasonable as successive tax audits will likely result
in lower deficiency taxes among frequently audited taxpayers due to a progressive learning
curve. Moreover, rather than concentrating on a limited few, the similarly limited manpower of
the BIR would be optimized by targeting other taxpayers, achieving a more inclusive audit.The
RMO also provides that the following cases are subject to mandatory audit:

 Claims for refund (e.g., VAT, income tax, erroneous payment);

 Applications for tax clearance for dissolution or retirement of businesses with gross sales/receipts
exceeding P1 million or with more than P3 million in gross assets ;
 Cases with unresolved Letter Notices;
 Request for tax clearance of taxpayers undergoing merger/consolidation and other types of
corporate reorganizations;
 Estate tax returns; and
 Policy cases identified by the Commissioner of Internal Revenue.
 On the other hand, the following are considered priority cases:
 Taxpayers reporting gross/net loss or no taxable income or no tax due for two (2) consecutive
years;
 Taxpayers with income tax due of less than 2% of gross sales/revenues;
 Taxpayers with increase in assets of more than 50% from the previous year but with reported net
loss;
 Professionals;
 Sellers of goods and services via e-commerce;
 Taxpayers with intelligence information such as specific business knowledge, third party data and
publicly available information (e.g., from media press releases vs. actual revenue/tax declaration
per return, etc.);
 Taxpayers who have failed to comply with the submission of information returns required
under existing revenue issuances (e.g., Alphalist, Inventory List, List of Tenants, Summary
List of Sales/Summary List of Purchases, eSales);
 Issue-oriented audits (e.g., transfer pricing, Base Erosion Profit Shifting, industry issues, etc.);
 Taxpayers whose compliance is below the established benchmark rate;
 Taxpayers enjoying tax exemptions/incentives;
 Taxpayers 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;
 Specific industries: Hospitals, Advertising Agencies, BPOs, Insurance, Amusement Centers,
Restaurants, Telecommunication, Real Estate; and
 Other priority audits that may be identified by the BIR.