[Ask the Tax Whiz] What is benchmarking?

The Philippine Tax Whiz clarifies the scope and limitations of a benchmarking notice from the Bureau of Internal Revenue, and how taxpayers should respond to it

What is benchmarking? Does the benchmarking notice from the Bureau of Internal Revenue (BIR) constitute a valid assessment?

Benchmarking is the process of setting a standard to determine the performance level of taxpayers in a given line of industry or sector. In this case, the ratios of net value-added tax (VAT) due and income tax due in relation to gross sales/receipt, vis-à-vis profit margin rate, is to be used for the purpose of setting the industry standard for taxpayers’ compliance.

A benchmarking notice does not constitute a valid assessment. Without a valid letter of authority from the BIR, there is no valid assessment. However, taxpayers whose tax compliance is below the duly established and approved benchmark shall be classified as follows:

High risk taxpayers – over 30% below benchmark
Medium risk taxpayers – 16% to 30% below benchmark
Low risk taxpayers – 15% or less below benchmark

Taxpayers classified as high risk will be prioritized for enforcement actions, such as surveillance, cash register machine/point of sale post evaluation, Oplan Kandado, inventory stocktaking, and audit.

What should taxpayers do when they receive a benchmarking notice? What happens if they ignore it?

As mentioned in the benchmarking notice, taxpayers are advised to amend their VAT and income tax returns to rectify any possible omission or error in reporting their VAT due and taxable income. If ever they want to refute the findings, taxpayers must provide an explanation in writing within 15 days upon receipt of the notice.

If taxpayers ignore the notice or fail to respond accordingly, the BIR would conduct the following enforcement activities pursuant to Section 6(C) of the National Internal Revenue Code (NIRC) and other related revenue issuances in order to verify true business performance:

Conduct overt surveillance at the establishment for at least 10 days under Oplan Kandado
Conduct inventory stocktaking or Tax Compliance and Verification Drive
Tax audit under Section 6(A) in relation to Section 56(B) of the NIRC

How can taxpayers use the benchmarking and industry profiling of the BIR to improve their compliance and possibly get rid of or reduce the risk of a tax audit and investigation? What’s the responsibility of the CEO or president of a company when it comes to the BIR audit?

The benchmarking and industry profiling of the BIR can be used as a reference to improve the compliance of taxpayers and avoid a potential tax audit and investigation. Note, however, that as ruled by the court, the benchmarking notice is not a valid assessment and cannot be used to enforce collections.

CEOs or presidents of companies must take full responsibility for compliance, making sure that all applicable tax rules and regulations are followed. They must at the very least meet the industry benchmarking or have a valid reason otherwise.

In view of the crucial role of company leaders, the Asian Consulting Group launched the Executive Tax Management Program exclusive to CEOs, founders, and presidents to equip them with strategic insights and practical skills in handling tax compliance and audit.