SECTION 1. Objectives - This Circular is issued to familiarize revenue personnel, taxpayers, and the independent CPAs with the provisions of Revenue Regulations Nos. 3-90 and 6-90. It is also the purpose of this Circular to clarify certain gray areas or doubtful provisions in the regulations.

REVENUE REGULATIONS NO. 3-90

SECTION 2. Coverage of RR 3-90 -

2.1 The submission of Certificate of Taxpayer Compliance (CTC) is optional; ie., taxpayers may or may not submit the CTC with their tax returns. However, only taxpayers submitting CTCs with their tax returns may be entitled to the privilege of last priority in audit and investigation.

2.2 The privilege of last priority is limited to taxes certified to by the CPA, namely: income tax, including withholding tax, and value added tax. Thus, other national internal revenue taxes like transfer taxes under Title III, other percentage taxes under Title V, excise taxes under Title VI, and documentary stamp taxes under Title VII, all of the Tax Code, may still be audited by the BIR although the taxpayer submitted CTCs covering its income tax, withholding tax, and value added tax liabilities.

2.3 To be entitled to the privilege, the taxpayer does not have to submit CTCs for both income tax and value added tax. If the CTC submitted covers only income tax and withholding tax, the privilege of last priority does not extend to value added tax liability of the taxpayer. In other words, partial certification is allowed. However, income tax and withholding tax, while they may be covered by two separate CTCs and filed separately at different dates, should always go hand-in-hand and both certifications should be unqualified to entitle a taxpayer to the privilege of last priority.

2.4 When a CTC is submitted by the taxpayer with his tax return, he does not automatically become entitled to the privilege of last priority. The taxpayer must submit an unqualified CTC to avail of the privilege herein granted. The privilege of last priority may also be extended to the taxpayer if the deficiency tax arising from the tax audit is paid by the taxpayer before or at the time of filing of the tax return and CTC. In such a case, the fact of payment and other relevant data should be indicated in the CTC. If the deficiency tax payment is made after the filing of the original qualified CTC, another CTC containing such payment of deficiency tax may be filed.

2.5 When the CTC attached to the VAT returns covers only the input tax aspects under RR 3-90, the privilege of last priority does not attach. The independent CPA must also certify to the correctness of the output tax for the same period covered by the CTC in order to qualify for the privilege.

2.6 The CTC is required primarily for taxpayers whose gross sales or gross receipts of the taxpayer exceeds P100,000 per annum. Since, Section 232(A) of the Tax Code requires the submission of audited financial statements when taxpayer ™s gross sales or receipts exceed P25,000 per quarter, and considering that RR 3-90 merely prescribes additional requirements for certification by CPAs, it follows that no such CTC is necessary to be submitted by taxpayers whose gross sales and/or gross receipts do not exceed P100,000 a year. However, a taxpayer with gross sales of gross receipts of not more than P100,000 may still avail of the benefit of last priority under RR 3-90 if he should submit an unqualified CTC.

2.7 Should the CPA discover some errors during the tax audit and the taxpayer is willing to pay the deficiency tax, the regular surcharge and deficiency interest shall be imposed and collected. The reason for this requirement is that the waiver of penalties may tempt taxpayers to underpay their tax liabilities and pay the correct tax only during the tax audit. Moreover, there is no legal basis for the waiver of penalties under said circumstances.

2.8 The regulation covers only income required to be reflected in the regular income tax return - BIR Form 1701 for individuals with business or professional income and BIR Form 1702 for corporations. It does not include gain, profit, and income covered by special (income tax) returns like the capital gains tax returns on the sale or exchange of real property and shares of stocks.

2.9 The privilege of last priority attaches only when the taxpayer files a final tax return together with an unqualified CTC. And in order to protect the interest of taxpayers who submitted unqualified CTCs with their tax returns, only the Commissioner of Internal Revenue and his Deputy Commissioners are hereby authorized to issue letters of authority to examine said taxpayers.

2.10 Withholding tax on income subject to final tax shall be included in the CTC. Only withholding tax on salaries and wages are excluded. Therefore, verification as to whether the withholding tax is withheld and remitted or not shall be made on the books of the withholding agent, not of the income earner.

2.11 When a taxpayer files with his tax return a qualified CTC with a general statement, the BIR may still verify all the items of incomes and deductions.

2.12 The privilege of last priority in audit does not apply to the following cases:

1. Claims for refunds or tax credits;
   
   
2. Cases covered by Sec. 235 (exceptions to the one-examination-in-a-taxable-year rule) of Tax Code;
   
   
3. Confidential information filed under Sec. 281 of the Tax Code.

2.13 Revenue Regulations No. 3-90 and 6-90 do not apply to Commission on Audit auditors who are tasked under the Constitution to conduct the audit of government owned or controlled corporations.

SECTION 3. Responsibilities of Taxpayers and CPAs -

3.1 The primary responsibility of filing CTC rests upon the taxpayer. The taxpayer is also the party primarily responsible for the veracity of the accounts shown in the tax returns and in the financial statements attached to the returns.

3.2 The CPA shall perform his tax audits in the interim period in accordance with the sets of guidelines prescribed in Statement of Auditing Standards and Practices Statement (SASP) No. 11, Procedures to be followed in the Review of Client ™s Income, Withholding and Value Added Tax Returns.

3.3 The CPA shall substantially conduct the tax audit on the items stated in the regulations. The following guidelines, among others, shall be considered in determining substantial compliance with the regulations:

1. System of internal control of the taxpayer (whether strong or weak);
   
   
2. Invoice amounts, particularly those issued by or to the major suppliers or customers of the taxpayer;
   
   
3. Industry or sector to which the taxpayer belongs;
   
   
4. Acceptable range of variance between the correct amount and the tax return prepared and audited by the CPA.

3.4 A CPA who has been engaged to perform a tax audit is required to submit his report to the Commissioner on the results of his tax audit. Should the taxpayer cancel the contract of engagement or should the CPA withdraw from his engagement during the course of a tax audit, the CPA concerned shall inform in writing the appropriate revenue official of such cancellation or withdrawal within thirty (30) days from the date of the cancellation or withdrawal.

3.5 A CPA is not obligated to disclose his findings during a tax audit relating to withholding tax on salaries and wages, considering that such tax is not covered by the regulations. However, with respect to all other types of withholding tax, whether final or creditable, the findings of the CPA should be communicated to the BIR through the CTC.

SECTION 4. Types of Certifications and Filing Dates -

4.1 There are three (3) types of tax returns under the regulations, namely:

(a)

returns without any certified financial statements; (b) returns with certified financial statements only (Sec. 232(A)]; and (c) returns with certified financial statements and CTCs.

4.2 The BIR allows taxpayers to file the CTCs with the tax returns concerned; i.e., monthly for the withholding tax, quarterly for value added tax, and yearly for income tax, whichever is most convenient for the taxpayer and his auditor. All the BIR requires is a CTC for income tax and a CTC for withholding tax submitted with the annual income tax return, and another CTC covering the four (4) quarters for VAT purposes depending upon the group or category assigned to the taxpayer. Taxpayers may, however, be allowed to file all CTCs covering income tax, withholding tax, and VAT liabilities not later than sixty (60) days from the due date for the filing of income tax returns, provided a written notice of its intention to submit a CTC shall have been attached to its income tax return at the time of filing.

SECTION 5. In order to have a uniform CTC, the following pro-forma annexes are recommended for adoption and use by independent CPAs -

Annex œB  - Unqualified CTC (Income, Withholding Tax, and Value Added Tax);

Annex œC  - Unqualified CTC (Income & Withholding Tax);

Annex œD  - Unqualified CTC (VAT & Inventory Valuation)

REVENUE REGULATIONS NO. 6-90
SECTION 6. The submission of copies of the engagement letter (whether pertaining to financial audit or tax audit) by independent CPAs is compulsory.

SECTION 7. The deadlines for the submission of copies of engagement letters for financial audit shall be as set forth in RMC 99-90 dated November 27, 1990.

Copies of engagement letter for tax audit should be submitted to the appropriate revenue offices mentioned in the regulations within thirty (30) days from the due date for the filing of the income tax return.

SECTION 8. When required by the Commissioner of Internal Revenue, the CPA shall produce or present a set of working papers as proof that an audit for CTC purposes has been performed. The examiner shall determine only that the working papers (a) indicate the composition of the audit team performing the audit; (b) the audit/work programs used in the audit are duly and completely accomplished; and (c) more importantly, verification of such data in the working papers to prove or show that the working papers are those indeed prepared for the particular taxpayer under examination.

SECTION 9. In cases of transfers of principal place of business of the taxpayer from one revenue district to another, the engagement letter shall be filed with the new district (if the new principal place of business is located outside of Metro Manila) or with the Office of the Commissioner of Internal Revenue (if within Metro Manila).

SECTION 10. This Circular takes effect immediately.

Adopted: 18 Feb. 1991