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REVENUE AUDIT MEMORANDUM ORDER

NO. 1-98

Subject : Audit Guidelines and Procedures in the

Examination of Interrelated Groups of Companies

To : All Revenue fficers Concerned!

This RA" is issued as a basis #uideline for the

joint and coordinated examination of

interrelated #roups of companies under Revenue

"emorandum rder $o! %&'()!

&! *AC+GR,$-

&!& The remar.able decrease in collection from

interrelated #roup of companies hasseriousl/ affected the collection efforts0 of the

*ureau! Statistics sho1ed that 1hile 2interrelated

transaction 2 accounts for a bi# percenta#e of the

transfer of #oods and services in the

countr/ 0 the revenue collection from related'part/

#roups continue to #o on a do1ntrend!

&!3 The ma#nitude of revenue lost has become so

alarmin# that there is a need to

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immediatel/ address this problem! It is a fact that

because these companies are more

interested in their net income as a 1hole 4rather than

as individual corporations5 there is

desire to minimi6e tax pa/ments b/ ta.in#

advanta#e of the loopholes in our tax s/stem and

b/ ma.in# use of schemes that allo1 them to move

around the la1 in order to reduce their

tax obli#ations!

&!7 It is therefore necessar/ to conduct a joint and

coordinated examination of interrelated

#roup of companies in order to identif/ the tax

avoidance schemes and be able to prescribed

the necessar/ measures in order to avoid the erosion

of revenues

3! GE$ERA8 G,I-E8I$ES

3!& General Procedures! The provision laid do1n in

9olume & of the andboo. on Audit

Procedures and Techni;ues must be follo1ed 1ithrespect to:

a! *asic reportorial re;uirements< and

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b! #eneral audit procedures and techni;ues!

3!3 Special Audit Procedures! In addition0 focus

must be made on the follo1in# audit issues

4detailed audit procedures are laid do1n in section 7

of this RA"5! btain a cop/ of the orld1ide Dinancial

Statements dul/ certified b/ an

independent public accountant of the countr/ 1hich

issues the financial statements

and authenticated but the Philippine Embass/ or

Consulate situated 1ithin the

countr/ 1here the ome ffice of the "$E is

located!

@! 9erif/ correctness of orld1ide peratin#Income and the orld1ide Sales fi#ures

a#ainst the financial statements obtained in > above!

%! Re;uest for a summar/ of Sales to the Philippines

dul/ certified b/ an independent

public accountant and authenticated b/ thePhilippine Embass/ or Consulate situated

1ithin the countr/ 1here the ome ffice of the

"$E is located! The Sales to the

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Philippines shall include the offshore portion of the

local construction projects 1hich

includes the suppl/ of machiner/ and e;uipment!

! Re;uest for presentation of copies of pertinent

sales invoices0 bills of ladin#0 frei#ht

and insurance covera#es and other documents to

verif/ Sales to the Philippines0 on a

test or samplin# basis!

Dor construction activities:

)! Revie1 all Contracts and anal/6e the nature of the

Contracts0 the parties involved0 the

terms and conditions0 the total contract price0 the

pa/ment and other pertinent information!

(! -etermine method of accountin#0 1hether

completed contract or the percenta#e of

completion0 and chec. the correctness of ta.e up in

the boo.s of accounts!

&B! Se#re#ate the income from exempt transactionsfrom that of taxable transactions0 if

applicable!

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&&! -etermine the total contract price and

composition of the project! The total contract

price includes:

a! Suppl/ of "achiner/ and E;uipment

4 sometimes referred to as the

offshore portionF5 MM

b! Suppl/ of 8abor = Civil or.s

4sometimes referred to as the

onshore portionF5 MM

'''''''''''

Total Contract Price MM

OOOOOOO

&3! 9erif/ that onl/ the suppl/ of local = civil 1or.s

4onshore portion5 is included in

computation of profit = loss on local constructionproject

&7! -etermine if cost and expenses correspond onl/

to the service portion of the project

referred to an && above!

&>! *e a1are of char#in# of income and expenses b/

mere boo. entries usin# the branch =

home office account!

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Dor all other activities

&@! 9erif/ that all income from other activities are

included as part of the #ross income!

&%! Ensure that onl/ expenses related to the activities

above are included in the

determination of the net income!

IV. EFFECTIVITY

This rder shall ta.e effect immediatel/!

LIWAYWAY VINONS CHATO

Commissioner of Internal Revenue

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