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Second, it compares the expense items reported in the Financial Statements (FS)/Income Tax
Return (ITR) with the items reported on the Alphabetical List of Payees From Whom Taxes Were
Withheld (Alphalist).
Where the amounts per SLS submitted by suppliers are higher than the amounts on the taxpayer’s
VAT returns/SLP, or where the expense amounts per taxpayer’s Alphalist are greater than those
reflected in the FS/ITR, the BIR examiners will assess defici ency income tax and VAT on the basis
that the unreported purchases and expenses result in undeclared income. This approach and
conclusion traces its roots from the “Net Worth Method” first used in 1956 in the case of Eugenio
Perez vs. J. Antonio Araneta to prove unreported income.
· The taxpayer’s own books and records, if made available by lawful means. When truthful, the
taxpayer’s own books and records usually establish the nature and source of the unreported
income; if false, these at least afford a starting point from which income items may be verified
from other sources.
· Books and records and corroborative statements of th ird persons who have dealt with the
taxpayer, often establishing payment of monies which would constitute taxable income to the
taxpayer.
· Increase in net worth; including investments, purchases of property and other busi ness
transactions by the taxpayer.
The purpose of each of these is to establ ish taxable but unreported income and any combination of
the methods may be resorted to by the government to support its case.
More recently, however, the Court of Tax Appeals (CTA) has promulgated decisions which
effectively restrict an unfettered use of the Net Worth Method.
The same is true for VAT, which is based either on the gross selling price or gross value in money
of the goods or properties sold, bartered or exch anged, or gross receipts derived from the sale or
exchange of services. Section 108 (A) of the Tax Code defines “gross receipts” as the total amount
of money or its equivalent representing the contract price, compensation, service fee, rental or
royalty, including the amount charged for materials supplied with the services and deposits and
advance payments actually or constructively received during the taxable period for the services
performed or to be performed for another person, excluding VAT.
In assessing VAT, it must be shown that the taxpayer received an amount of money or its
equivalent from its sale, barter or exchange of goods or properties, or from the sale or exchange
of services performed. VAT, like income tax, also cannot be assessed based on un derdeclared
purchases.
Thus, even if the expenses per Alphalist were to be considered as income, the same shall be offset
by treating the equivalent payments as purchases for which input tax credits may be claimed.
Thus, no taxable income will result from the said transactions.
In these and other similar CTA decisions, the message is clear. While tax assessments are
presumed to be correct, the assessment itself should not be based on presumptions regardless of
how logical the presumption might be. The assessment mu st be based on actual facts in order to
stand the test of judicial scrutiny — a reiteration of a 2005 decision by the CTA that in a naked or
a baseless assessment, the determination of the tax due is without rational basis, and that the
determination must rest on all the evidence introduced and its ultimate determination must find
support on credible evidence.
In a February 2015 decision, the CTA also ruled that while the BIR can resort to the Best Evidence
Obtainable Rule and estimate the tax liability of taxpayers who failed to submit their accounting
records lost due to calamities, the BIR is still, however, required to provide sufficient basis for its
estimate.
Given the seriousness of a BIR tax assessment, it is important that taxpayers have a clear
understanding of the due process and other legal considerations involved in the tax assessment.
They must be equipped with the latest jurisprudence not only for better compliance but also to
defend themselves against tax assessments.