Scope of claims covered and audit start
- The order covers audit of claims for refund or tax credit of VAT arising from zero-rated transactions.
- The order also covers audit of claims involving purchase or importation of capital goods.
- Every audit of a claim for refund or tax credit is covered by a Letter of Authority (LA).
- The 60-day period for processing claims for refund/tax credit starts on the day of submission of the last of the documents in the checklist of requirements.
Administrative policies for delinquent accounts
- Before a refund or tax credit certificate (TCC) is issued, delinquent account(s) must be settled by the claimant.
- Settlement is done either by:
- agreeing to the issuance of a separate TCC usable only to pay the delinquent account, with such limitation indicated on the face of the TCC; or
- paying the delinquent account in cash.
- Refund or TCC is then issued for the excess of the approved claim over the delinquent account.
- If the delinquent account has been protested, the claim for refund/TCC may proceed if the protest was filed in accordance with Revenue Regulations No. 12-85.
- The fact that the delinquent account is protested is certified by the Chief, Receivable Account Division not later than five (5) days from the date of referral.
- Findings of deficiency in internal revenue taxes other than VAT and other taxes covered in the LA are referred to the proper audit Office.
Tax Credit Certificate use and effect
- The Tax Credit Certificate (TCC) may be used by the grantee or his assignee in payment of any of their direct internal revenue tax liability.
- If a separate TCC is issued to settle delinquent accounts, the TCC is usable only for that purpose and the restriction is indicated on the face of the TCC.
Core objective and pre-audit verifications
- The audit objective is to ascertain the refundable/creditable VAT input tax on zero-rated transactions.
- Effective audit requires familiarization with:
- the taxpayer’s business organization and whether it has business establishments other than its main/head office;
- the taxpayer’s economic activity (e.g., sale of goods, sale or services);
- the taxpayer’s accounting methods and policies and the degree of internal control.
- Where applicable, the audit may consider the prior period’s audit report on the taxpayer’s VAT liabilities, especially deficiencies reported then but not corrected in the current period.
- For export sales of non-VAT taxpayers, the audit treats them as VAT exempt sales under Section 103(v).
- For VAT taxpayers claiming zero-rating under special laws, international agreements, or Revenue Regulation (RR) 2-88, prior approval of application is a mandatory condition to entitlement.
- Claims must be filed within two (2) years, with filing periods dependent on the transaction type:
- for export sales: within 2 years from the date of exportation;
- for importation or local purchase of capital equipment: within 2 years after the lapse of 180 days from the last day of the quarter in which the purchase was made;
- for other zero-rated transactions: within 2 years from the date of the transaction.
Audit of sales and output tax
- The audit reconciles sales by comparing:
- amounts per VAT return versus subsidiary sales journal and ledgers, and/or the head office general ledger, and branch subsidiary journals;
- and the reported zero-rated sales per application using BIR Form No. 2552.
- Discrepancies in sales reconciliation must be immediately brought to the taxpayer for reconciliation/explanation.
- Sales accounts are reviewed to ensure proper classification:
- only those transactions specifically exempt under Section 103 of NIRC are treated as exempt sales;
- “deemed sales of goods” are recorded as taxable transactions under Section 4 of RR 5-87.
- Deemed sales include transfers/use/consumption not in the course of business, distribution/transfer to shareholders as share in profits, transfers to creditors in payment of debt or obligation, consignment where actual sale is not made within 60 days after consignment (and consigned goods returned within that 60-day period are not deemed sold), and retirement/cessation/death affecting inventories, including change of ownership/incorporation, partnership dissolution creating a new partnership taking over the business, and death of the individual VAT-registered person even if the estate/heirs continue operation.
- The audit verifies that “zero-related” sales actually emanate from export sales, foreign currency denominated sales, and other transactions qualifying or effectively qualifying as zero-rated sales under NIRC Sections 100(a)(1)(2) and 102(a)(1)(2)(3) and Section 8 of RR 5-87.
- Direct export sales require examination of export sales agreements (product nature, pricing, terms), export documents (commercial invoice/receipts, bills of lading/airway bill, export declaration/permit, packing list), and proof that export proceeds were actually inwardly remitted.
- Export remittance verification requires liquidation statements/certification from the Central Bank or accredited agent banks showing export proceeds, inward remittance date, conversion rate, and total peso value under RMO 23-88.
- The audit requires preparation and submission of Schedule I with the following data: date of export; sales invoice number; consignee name; AWB/BL number; shipment date; amount in foreign currency per invoice; amount remitted in foreign currency; conversion rate; amount remitted in pesos; date of remittance; accredited bank; bank credit memo number; sales per books; discrepancies between foreign currency remitted and remittance vs. foreign currency invoiced; and discrepancies between peso remitted and peso per books.
- Foreign currency denominated sales require verification that:
- buyers are Filipinos residing abroad, returning overseas workers, or other non-residents;
- goods are for household/personal use, assembled/manufactured in the Philippines, delivered to residents of the Philippines;
- goods are paid for in convertible foreign currency inwardly remitted through the banking system (evidenced by a Central Bank or accredited bank statement);
- sales do not exceed an aggregate value of US $1,000 or its equivalent;
- claims are checked from Philippine International Trading Corporation or the appropriate government agency implementing the scheme.
- Zero-rated sale of services requires verification of contracts, identity of service recipient, consideration, service description, and documents evidencing actual payments; inward remittance of foreign currency proceeds is verified under Central Bank rules and regulations, and Schedule II is prepared with contractee, contract price, billed foreign currency, received foreign currency, official receipt number, receipt date, conversion rate, received amount in pesos, bank name, bank credit memo number, and discrepancies between billed and received amounts.
- For constructive inward remittance, the claimant must submit:
- Central Bank approval of the offsetting arrangement;
- Central Bank certification on the amount constructively remitted under the offsetting arrangement.
- If inward remittance is less than total inward remittance less than total zero-rated sales, the input tax allocable to the unremitted portion is removed from allowable input tax using the formula:
- Unremitted Export Proceeds / Total Zero-Rated Sales x Allowable Input tax Allocable to unremitted export sales (as expressed in the order’s computation).
- For effectively zero-rated transactions, the audit requires a copy of the approved application for zero-rating and tracking of effectivity and revocation dates; transactions effected before effectivity are subject to VAT under RR No. 2-88.
- The audit analyzes accounts affecting total sales, especially cash, accounts and/or notes receivable, collections, sales discounts, sales returns, and bad debts written-off.
- For service transactions, the audit includes advances, retention receivables, mobilization fees, and similar accounts.
- The audit applies pro-forma computations:
- to arrive at total sale of goods, combining cash sales, collections on receivables, notes receivable collections (when notes pertain to sale of goods), sales discounts, sales returns/allowances, bad debts written-off, and changes in accounts receivable and notes receivable to compute sales on account and total sales for the period;
- to arrive at receipts during the period, computing taxable gross receipts by aggregating income/billings, adding beginning receivables and retention receivables, subtracting ending receivables/retention receivables, adding deposits/advances/mobilization fee, then subtracting gross receipts from exempt services to isolate gross receipts from zero-rated services and compute taxable gross receipts.
- Audit checks include:
- scrutiny of subsidiary sales journal entries vs. sales invoice information;
- compliance with invoicing requirements, including that invoices bear the VAT registration number under Sections 108(a) and 238 of NIRC;
- accounting for unused sales invoices as of December 31, 1987 for verification of VAT liabilities for 1st quarter/semester of 1988 and verification of authority to print subsequent receipts/invoices; unauthorized printing or discrepancies may suggest fraudulent practices;
- checking authority to use cash register machines and verifying each register is duly authorized;
- ensuring all sales invoices are accounted for, including serial-number sequence continuity, branch assignment, and retention of original copy for cancelled invoices; and requiring authority presentation for loose-leaf invoice use;
- alerting to double sets of invoices bearing identical serial numbers;
- verifying that issuance of statements of account, delivery receipts, debit notes, and similar documents are properly recorded as sales, and treating unrecorded sales indicators as violations except for bona fide consignment sales;
- when delivery receipts are encountered, determining whether they cover consummated sale or consignment sale, and treating consignment as taxable after 60 days following consignment date under Section 4(D) of RR 5-87;
- for taxpayers engaged in both taxable and exempt transactions, ensuring VAT invoices are used only for VAT taxable transactions and separate invoices are issued for exempt transactions under Section 21 of RR 5-87, and treating exempt transactions with VAT invoices as subject to VAT.
- For zero-rated transactions by BOI export-oriented enterprises or other entities whose purchases are effectively zero-rated or exempted under special laws/international agreements, the audit checks whether “ZERO-RATED” or “EXEMPT” is prominently stamped/printed on the sales invoice; if not, the transactions are considered taxable under Section 2(a)(3), RR 2-88.
- The audit determines VAT billing method and output tax:
- where VAT is not separately billed or is erroneously billed, output tax is computed by multiplying gross sales (including the amount intended to cover tax or erroneously billed tax) by 1/11 or such other factor applicable to persons partially exempt under special laws, under Section 6(a) and (b) of RR 5-87.
- If a taxpayer enjoys full or partial VAT exemption under special laws, the audit determines output tax using exemption levels and corresponding factors:
- 0% → 1/11;
- 10% → 1/12.11;
- 20% → 1/13.5;
- 50% → 1/21;
- 75% → 1/4.
- Other charges included in gross taxable sales (excise taxes, packaging, insurance, freight, delivery expenses, etc.) are verified.
- For gross taxable sales of services (GTSS), advance/downpayment/deposits and material cost supplied with services form part of GTSS; contract terms determine whether materials are purchased by/for the customer/contractee or by the service provider.
- The audit identifies selling prices unreasonably lower than marker price and adjusts accordingly under Section 6(a) of RR 5-87.
- Sales deductions are verified:
- sales returns/allowances may be deducted only if previously recorded and properly supported by debit memos;
- discounts may be taken only if indicated on the face of the invoice at time of sale and without condition on subsequent events or fulfillment of conditions (e.g., prompt payment or sales goals) under Section 100(d)(3).
- For VAT taxpayers claiming the 4% contractor’s tax privilege after December 31, 1987, the audit verifies specified conditions:
- filing an information return showing contractor’s name, outstanding contract price as of December 31, 1987, and declaration to pay contractor’s tax due;
- attaching contractor’s billing issued prior to January 1, 1988 to the information return;
- recording outstanding contract price receivable on taxpayer’s books for contracts completed and billed as of December 31, 1987;
- filing contractor’s tax return on or before January 30, 1988 or the 20th day of the month following the end of each calendar quarter.
- Failure to comply with any of the above conditions subjects the amount received to 10% VAT under Section 6(g) of RR 5-87.
- Under-declaration indicators include abnormal levels of inventories, sales, purchases, accounts receivable (including interbranch manipulation), and other related accounts; cross-checking with selected customers and suppliers is required by audit practice in this order.
Audit of purchases and input tax
- The audit reconciles purchases by comparing each purchase category per VAT return with purchases per subsidiary purchase journal under Section 22(b) of RR 5-87 and verifies that required information is maintained in the purchase journal.
- The review of purchase accounts requires ensuring:
- purchases from non-VAT and/or exempt persons do not result in any input tax credit;
- effectively zero-rated purchases do not result in input tax credit;
- purchases from VAT persons that are personal in nature do not give rise to input tax credit;
- deemed-paid input tax credits for BOI-registered pioneer enterprises are correctly determined under Section 13(4) of RR 5-87.
- The audit scrutinizes subsidiary purchase journal entries against purchase invoice information.
- Input tax credits must be substantiated:
- the purchase invoice must be issued in the name of the VAT-registered taxpayer claiming credits, bear seller’s VAT number, adequately describe goods/services, have an invoice date within the period being claimed, and show printer’s authority to print;
- for purchase of services, claims must be supported by official receipts;
- for domestic purchases of goods (including capital assets) and services in the course of business, these must be supported by VAT invoices or receipts showing information required under Sections 108(a) and 238 of NIRC;
- cash register machine tape, even if it indicates the seller’s VAT registration number, is not valid proof for input tax credit;
- delivery receipts or statements of accounts do not serve as valid proof of input tax credit for this purpose.
- Input tax on importation must be supported by import entries or equivalent documents showing actual payment of VAT on imported goods under Section 15(b) of RR 5-87; withdrawals of raw materials or goods for customs bonded warehouses without VAT payment do not qualify for input tax credit.
- VAT invoices issued for exempt and zero-rated transactions do not generate input credits for the purchaser.
- The audit verifies the billing manner on purchase invoices/receipts to ensure correctness of input tax credits under Section 13 of RR 5-87.
- Purchase returns and allowances must produce corresponding reduction of the input tax credit balance under Section 6(c) of RR 5-87.
- Where sales of goods or services are exempt under special laws, the taxpayer is only entitled to input tax credits equivalent to its level of exemption in the year of sale.
- Deemed/Presumptive input tax and deemed-paid input tax credit do not qualify for refund or issuance of Tax Credit Certificate.
- Input tax credit affected by applications must reflect reduction in available input tax at the time of application; this includes applications for TCC not only filed with the BIR but also filed with agencies such as BOI and the Bureau of Customs under Section 11 of RR 5-87.
- For VAT-registered persons engaged in both VAT taxable and exempt activities, input taxes paid for purchases and services that cannot be directly attributed must be allocated between VAT taxable and non-VAT operations using the computation prescribed in Section 12 of RR 5-87; input tax allocated to exempt transactions reduces input tax credit.
- The audit reconciles:
- the input tax claimed in the VAT return carried over from previous quarters and the portion carried to succeeding quarters;
- input tax on goods/services/capital goods recorded net of VAT.
Cancellation of invoices after approval
- After final approval of the claim, but before preparation of the TCC or disbursement voucher for refunds, allowed or disallowed input tax sources such as original purchase invoices and official receipts must be cancelled by stamping the words “cancelled” on the invoice or official receipt.
- The cancellation is initiated by the canceling officer.
Reporting requirements for the VAT audit report
- The audit report must be brief and concise but complete in all details necessary for understanding.
- The audit report must be accompanied by:
- a copy of the Letter of Authority;
- VAT returns for the audited period, together with proofs of payment of VAT;
- worksheets showing schedules on zero-rated sales and inward remittance; purchases and input tax; analysis of relevant accounts; adjustments to sales and output tax; schedules of disallowances; computation of allowable input tax attributable to zero-rated sales for refund/TCC; computation of deficiency VAT; computation of deficiency taxes other than VAT;
- a revenue officer’s memorandum report duly accomplished, VAT audit report annexed as Annex “aa” (noted with VAT audit report from Annex “aa”) and authority to issue VAT credit/refund noted as Annex “A-1”;
- agreement form in proper cases;
- photo copy of revenue official receipt or confirmation receipt evidencing payment of deficiency tax, if applicable;
- documents including:
- three (3) copies of application for VAT Credit/Refund (Form No. 2552);
- photocopy of approved application for zero-rating for effectively zero-rated sales;
- VAT return(s) filed for the quarter showing credited purchases of zero-rated sales were not applied against output tax for certain quarters and VAT return for succeeding quarter;
- certificate of taxpayer showing amounts of zero-rated, taxable and exempt sales where applicable;
- Central Bank approval of offsetting arrangement and Central Bank certification on constructively remitted amounts;
- certifications from BOI/BOC/EPZA that the taxpayer has not filed similar claims for the period;
- for 100% exporters, sworn statement that ending inventory as of the close of the period claimed was used directly or indirectly in products subsequently exported, supported by export documents under RR 9-89;
- bank liquidating statements and other documents;
- delinquent account and verification report;
- all other documents specified in the checklist of requirements.
- Compliance with the checklist and prescribed procedures is enjoined under the order’s directive.
Checklist of filing requirements
- The checklist requires three (3) copies of application for VAT Credit/Refund (Form 2552).
- The checklist requires a photocopy of the approved application for zero-rate for effectively zero-rated sales.
- For local purchases, the checklist provides that supporting documents must include VAT purchase of goods and official receipts for services, with a corresponding summary of purchases and input tax claimed, invoices arranged according to the summary list; separate lists and documents are prepared for input tax not within the period or not previously claimed.
- For importations, the checklist requires photocopies of invoices, import declaration, import entry documents, official receipts or confirmation receipts evidencing payment of VAT, with segregation of payments made by cash or tax credit, plus a summary of importations with specified fields.
- The checklist requires VAT return(s) for the quarter showing that tax credited on purchases of zero-rated sales were not applied against output tax for certain quarter(s) and the VAT return for the succeeding quarter.
- The checklist requires a certificate of taxpayer showing amounts of zero-rated, taxable and exempt sales where applicable.
- Where zero-rated transactions are regulated by certain government agencies, the checklist requires a statement showing amount and description of sale of goods and services, names of persons/entities (except exports) to whom sold, and date of transaction.
- The checklist requires authority to maintain a Special Dollar Account.
- The checklist requires other documents if applicable, including articles of incorporation for first-time filers, sales contracts/agreements, beginning and ending inventory, BOI registration, VAT registration for first-time refund/TCC claimants, and certifications from BOI/BOC/EPZA that no similar claims were filed for the period.
- For 100% exporters, the checklist requires a sworn statement that ending inventory at close of the period claimed was used directly or indirectly in products subsequently exported, supported by export documents under RR 9-89; for indirect exporters, it requires liquidation documents evidencing actual utilization of raw materials in manufacture of goods at least 70% of which have been actually exported under RR 2-88.
- The checklist includes audited financial statements when applicable.
Specific requirements by transaction type
- For export sales (including semi-conductor companies, garments, food, etc.), the checklist requires:
- a summary of export sales including date of exportation, sales invoice number, buyer name, airway bill/bill of lading number, lading date, amount in foreign currency, peso value, remittance date, bank credit memo number, and amount remitted in pesos;
- photocopies of export documents including invoices/receipts evidencing sale of goods with delivery recipient name, and export declaration/permit;
- bank credit memoranda and a certificate from the Central Bank or accredited agent bank showing inward remittance of proceeds in acceptable foreign currency and stating foreign currency amount, date of export, date of inward remittance, conversion rate, and total peso value.
- For zero-rated sale of goods or services (including contractors, mining, etc.), the checklist requires:
- an authenticated copy of the contract showing person for whom services were rendered, amount of consideration, description of services, and documents evidencing actual payments;
- photocopies of official receipts and billings with a summary of billing date, principal name, official receipt number, receipt date, amount in foreign currency, corresponding peso value, date of remittance, bank name, bank credit memo number, and amount remitted in pesos;
- bank credit memoranda and Central Bank certificates with information similar to export sales;
- reconciliation of billings against inward remittances.
- For manning services, additional checklist requirements include:
- a monthly Central Bank report on income of agency received; and
- breakdown of gross foreign receipts specifying nature of foreign currency received and totals with peso equivalent, bank credit memo number, bank name, and date of remittance.
- For effectively zero-rated sales of goods/services (including contractors, mining, etc.), the checklist requires:
- a summary of sales invoices/receipts with recipient name/entity, delivery date, consideration amount, and description of goods/services;
- reconciliation of billings against payment;
- evidence of actual receipt of goods or services.
- Additional requirements for mining companies include reconciliation of billings against actual collection and an operating agreement with the owner of mining claim(s), if applicable.
- For purchase of capital goods, the checklist requires:
- original copies of invoices/receipts showing date of purchase, purchase price, VAT paid, and description of the capital equipment locally purchased;
- for imported capital equipment: photocopy of import entry document and confirmation receipt of payment issued by the Bureau of Customs for VAT paid.