Amazing to learn the effective approach of the BIR in examining the records and returns of IMPORTERS.
by EMELINO T MAESTRO, Father of Tax Accounting, Tax Guru
Acceptably, gross sales and receipts derived from illegal activities are subject to value added and income taxes while the costs and expenses directly related to the conduct of illegal trade are non deductible therefrom.
Unfair? Unacceptable?
Making an illegal income is subject to taxation because there is no law that prohibits the State not to tax them. In this view, the tax return is a the best evidence to prove an illegal activity.
An illegal expense is not allowed as a deduction from legal or illegal income because the act and its fruits executed against the laws of the State is considered VOID ab initio.
By consenting it to be an allowable deduction is to permit the proliferation of illegal activities.
The invigorating BIR audit techniques which would pin down most of the importers are as follows, viz;
Without going to the importers’ principal places of business, BIR shall only secure from its own files the following, viz;
1. past and present inventory list,
2. audited financial statements,
3. income tax return - 1701/1702
4. value added tax returns - 2550Q, and
5. import entry declarations (IED).
2550Q versus IMPORT ENTRY DECLARATION.
The amount in the box ‘IMPORTATION’ of four quarters of 2550Q shall be added up and compared to IED for the same year.
If the 2550Q figures are higher than IED, then, there is a presumption that the import duties and taxes for the difference were not paid. Thus, to pay not the true and correct duties and taxes makes the goods imported to be classified as smuggled/illegal ones. Therefore, amounts associated thereto cannot be allowed as deductions from gross sales and receipts. This overstated the costs of sales, depreciation, and admin expenses, and would be understating the payment of income tax.
On the other hand, if the same would be treated as an undeclared expense, the same amount would also be considered as an understatement of sales, Therefore, the payments of value added and income taxes are also understated.
INVENTORY LIST.
The past and present inventory lists would be utilised. Primarily, the BIR is interested to determine the ratio or components of the imported and local goods in the costs of sales as well as in the administrative expenses. Once established, these ratios can be a very powerful tool to check if the amounts of the smuggled or illegal goods are deliberately classified under the local purchases category in the 2550Q, income tax return and audited financial statements.
AUDITED FINANCIAL STATEMENTS.
Also the BIR is so interested to know the gross profit ratio.
By way of using it, the unsubstantiated costs and expenses would be easily identified. Thus, the corresponding deficiency VAT and income tax therefrom may be computed and collected
