1.1. The theme of "Government Revenues - Accountability and Audit" has been divided into the following sub-themes and each sub-theme has been developed to bring out the totality of the Philippine experience in accountability and audit of government revenues:
2.1. In the Philippines, government revenues cover tax and non-tax items. The major sources of government revenues are taxes which represent compulsory payments to finance government operations. Tax revenues include the following:
Income taxes -
Property taxes -
Taxes on goods and services -
Taxes on international trade and transactions -
Other taxes -
2.2. On the other hand, non-tax revenues are those earned or realised from regular operations and services rendered, government business or proprietary operations, sales of assets, and grants/aids, whether actually collected in cash or accrued resulting in addition to or increases in the net assets of the government. Specifically, these revenues are the following:
Operating and service income -
Income from public enterprises/investments -
Miscellaneous income -
Sale of Assets -
Grants and aids -
|Tax revenue as
percentage of GDP
percentage of tax revenue
3.1. The authority of the Commission on Audit emanates from the Constitution of the Philippines. The Commission on Audit (COA) is a constitutional body whose jurisdiction extends to all subdivisions, agencies and instrumentalities of the Government, including all government-owned or controlled corporations, self-governing boards and commissions.
3.2. The Constitution, in so creating the COA, made it an independent office in order to make it more objective in its appraisal of government operations and the management of its resources. It vests in the Commission the power to examine, audit, and settle, in accordance with law and regulations, all accounts pertaining to the revenues and receipts of the Government as a whole.
3.3. The Commission is endowed, under the 1987 Constitution, with an exclusive authority to define the scope of its audit and examination, establish the techniques and methods required therefor, and promulgate accounting and auditing rules and regulations.
3.4. It is well settled in the Philippines that management shall assess and collect all revenues and receipts. The duty of the Commission is to determine whether such functions of management has been properly accomplished. In order to carry out this mandated duty the Commission assigns an auditing unit in every subdivision or agency of the government.
4.1. The systems-based audit approach is adopted in the audit of government revenues. This approach provides six major stages which ensure that the auditor receives the assurances he needs in rendering an opinion on the agency's financial statements. The stages consist of initial planning, understanding the agency's control system, preliminary evaluation of internal control, test of controls, substantive tests, and final review and evaluation.
4.2. The audit of revenues is approached on a post-audit basis. Post- audit is the process of examining collections after payment has been made and recording thereof has been completed. The audit is normally performed by the resident auditors. However, in some instances, a special team is created to conduct revenue audit.
4.3. In the post-audit of revenues, auditors apply a variety of audit procedures. One of them is Tests of Transactions. This technique involves a detailed verification of selected groups of transactions. Verification usually includes examination of source documents in reviewing assessments, determining collections, accuracy of recording, proving totals and calculations, and verifying remittances. These procedures provide the auditor assurance on how effectively internal accounting control system functions in their respective areas of assignment. The extent to which the tests of transactions should be applied depends on the auditor's evaluation of internal control.
4.4. The most common audit procedure employed in the audit of revenues is the Detailed Account Analysis. This procedure, in addition to the technique used in the tests of transactions, analyses in greater detail the revenue accounts.
4.5. Except for the Bureau of Internal Revenue, a systematic examination and evaluation of assessment records has been performed in all revenue-generating agencies. However, due to the large volume of revenue transactions, a sampling methodology has been devised so that the number of audit samples to be selected is directly tied-up or equated to the quantity that can be reasonably performed by the number of audit staff assigned to do the post-audit work.
5.1. As provided under the Auditing Code of the Philippines, the first standard of field work requires that the audit engagement be adequately planned and assistants be properly supervised. Adequate planning is important to insure that the audit results will meet the objectives of the revenue audit. The initial planning procedures are designed to enable the auditor to develop an effective audit strategy. This includes planning how the audit objectives can be attained while establishing a balance between audit scope and the time to be spent to ensure optimum use of audit resources. The procedures required to effectively plan an engagement generally are the same for all audit engagements, although the effort involved in completing the planning phase will vary significantly depending on the size and complexity of the agency's operations, timing considerations due to overall quality of internal control system and other considerations which are unique to the particular agency.
6.1. In the case of post-audit of revenue transactions, the Certificate of Settlement and Balances (CSB) is the final output of the auditor. This serves as the instrument through which the agency is regularly informed of the suspensions, charges and other deficiencies noted in the audit of its revenue transactions. Through the CSB, the agency head is informed of the persons who have been determined to be responsible for the suspensions, or liable for the charges.
6.2. The CSB is issued within ten days after the end of each quarter, for every accountable officer and for each fund. It is supported by the Summary of Suspensions and Charges, Summary of Suspensions Maturing into Charges, and the Summary of Settlements of Suspensions and Charges.
6.3. Before the CSB is prepared, notices have already been issued. One is the Notice of Suspensions (NS) which is issued as often as suspensions are made by the auditor for the purpose of notifying the agency head and the accountable officer concerned on the suspended transactions. Another is the Notice of Charges (NC) which is issued as often as charges are made by the auditor to notify the agency head, accountable officer concerned and other persons liable for the deficiencies noted. The Audit Observation Memorandum (AOM) may likewise be issued to notify the agency head and/or other officials concerned relative to the findings/observations/other deficiencies noted which require comments/reply within a reasonable time.
6.4. In the case of special audit, a special audit report is prepared. However, prior to its preparation, an AOM issued to notify management of the findings/observations noted, and require them to explain or justify the situation.
6.5. The Annual Audit Report (AAR) is also prepared by the auditors to serve as the final output of the yearly comprehensive audit conducted. It is the medium used by the auditor to communicate to the auditees and proper authorities, including the Office of the President and the Congress, the results of his appraisal of how management had discharged its fiscal responsibility. The report includes the auditor's recommendation of measures necessary to improve the economy, efficiency and effectiveness of agency operations.
6.6. The AAR has a linkage with the CSB since the significant audit findings and recommendations contained in the NS, NC, and AOM are summarised in the said report.
6.7. Finally, the overall report which the Commission on Audit is constitutionally mandated to submit to the President of the Philippines and the Congress is known as the Annual Financial Report (AFR). This report aims to serve as an effective tool in national planning and decision-making on matters involving fiscal and operational affairs of the government. Specifically, it includes significant audit findings on revenue administration.
7.1. The computerised tax system of the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) has not yet been fully operationalised as of date. Hence, the Commission on Audit has not completely applied IT audit techniques in the audit of revenues generated by these agencies. At present the BIR and the BOC are in the process of developing their respective tax systems.
7.2. However, even during the development of the system, the COA at critical stages of development evaluates the proposed system to ascertain that the basic internal controls are built in the design. This evaluation is being undertaken so that appropriate action can be taken as early in the systems development life cycle as possible. It is usually more difficult and expensive to build adequate controls once the system has been implemented.
7.3. When the computerised tax system become fully operational, the COA intends to conduct a post-implementation evaluation or audit of the system to check its validity, accuracy, completeness and auditability. Specifically, this review will check whether controls are working as planned and are sufficient to permit audit reliance. COA usually utilises computer-assisted tools such as audit software packages (Integrated Data Extraction and Analysis, Audit Command Language) to evaluate and test the more technically complex controls. Moreover, the post-implementation review will also help COA to identify areas for future development.
7.4. In addition, COA also plans to conduct Data Centre Review of the BIR and BOC computer centres. This type of review incorporates evaluation of the data processing organisational structure, staffing practices, systems development standards, operating procedures, security, program and data library control, communication network, and backup and disaster recovery procedures. The effectiveness of these basic procedures and controls has a pervasive impact on the accuracy and completeness of all computerised processing.
7.5. The problems confronting COA in the conduct of IT audit are the lack of trained and experienced IT auditors and the inability of COA to keep up with the rapid technological/IT developments. COA does not have enough qualified personnel who have both audit and IT processing skills. However, it has been conducting a massive training on information systems audit. But it still cannot cope up with the demands for IT audit services because more and more government agencies are into computerisation. It is not unusual to find a situation wherein the COA auditor is still familiarising with the agency's computerised system but management is already into upgrading their system with the recent technology to cope up with the demands of complex processing.
8.1. From time to time, the Commission on Audit through the State Accounting and Auditing Development Office conducts trainings on revenue audit, and on computer to develop or improve the capabilities of the auditors in the audit of government revenues. Other training courses which cover audit of revenues and receipts are Government Auditing, and Value- for-Money (VFM) Audit. Those who have already attended the said trainings were likewise required to re-echo in their respective offices/regions.
8.2. Auditors are also provided with copies of Revenue Audit Manuals to guide them in the conduct of revenue audit.
9.2. The provinces are specifically empowered to impose and collect tax on transfer of real property ownership, tax on business of printing and publication, franchise tax, tax on sand, gravel and other quarry resources, professional tax, amusement tax, real property tax, toll fees or charges, etc., while the cities may levy the taxes, fees and charges which the province or municipality may impose.
9.3. The municipalities, on the other hand, may levy taxes, fees, and charges not otherwise levied by provinces, while the barangays may levy taxes on stores or retailers, barangay clearance, and services, fees and charges.
10.1. The established rules in statutory construction are equally applicable to tax statutes. Thus, in interpreting tax laws, the primordial consideration should always be the intention of the legislature (Congress) in passing the law. But where doubts exist in determining the legislative intent, the doubt must be resolved liberally in favour of taxpayers and strictly against the taxing authority. As to the question however of whether a tax statute is valid or not, the same must always be resolved in favour of its validity, for tax statutes or all laws for that matter are presumed valid unless declared otherwise by the Courts.
10.2. Tax exemptions (or equivalent provisions such as tax amnesties and tax condonations) on the other hand are not presumed but are strictly construed against the grantee-taxpayer. The reason is "the law does not look with favour on tax exemptions so that he would seek to be thus privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted." (Commissioner of Internal Revenue vs. P.J. Kiener Company, Ltd., 65 SCRA 143). Thus, where the law grants tax exemption for the manufacture and sale of a certain type of machine, the same should not be presumed to include the manufacture and sale of articles produced by said machine. Tax exemption therefore cannot be established by mere implication but it must be clearly expressed.
10.3. In the following cases, however, tax exemptions are construed liberally in favour of the grantee, viz:
10.4. As to the date of effect, tax laws are imposed prospectively and not retroactively, unless so expressed by such laws.
11.1. The following are selected major judicial pronouncements on the central concepts of taxation:
A. Commissioner v. Algue, 158 SCRA 9
Issue: Whether or not taxation is an arbitrary form or method of exaction.
Ruling: Taxes are what we pay for civilised society. Without taxes, the government would be paralysed for lack of the motivating power to activate and operate it. Hence, despite natural reluctance to surrender part of one's hard earned income to the taxing authorities, every person who is able, must contribute his share in the running of the government. The government for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbolic relationship is the rational of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction.
B. Francia v. Intermediate Appellate Court, 163 SCRA 754
Facts: Francia is the owner of a house and lot situated at San Isidro, Pasay City with an area of 325 sq. m. and is covered by a title. On October 15, 1977, 125 sq. m. of the property worth P4,l 16.00 was expropriated by the Government. Francia had however failed to pay the corresponding real property tax on the property for the period 1963-1977. Thus, his property was sold at public auction by the City Treasurer pursuant to the Real Property Tax Code to satisfy his tax delinquency. Francia filed a complaint to annul the sale claiming, among others, that since the government was indebted to him in the amount equivalent to the expropriated property, his tax delinquency has been extinguished by legal compensation.
Issues: Whether or not the sale is valid, and whether or not taxes could be proper subject of legal compensation.
Ruling: The sale was valid. By legal compensation, obligations of persons, who in turn own right are reciprocally debtors and creditors of each other, are extinguished. However, taxes are not debts and therefore cannot be proper subject of compensation.
There can be no offsetting of taxes against the claims that a taxpayer may have against the government. A person cannot refuse to pay tax on the ground that the government owes him an equal amount. Taxes do not arise out of contract but rather out of duty of every individual to contribute his share to the upkeep of the government. In fact, personal consent of individual taxpayer is not required.
C. Sison v. Ancheta, 130 SCRA 654
Facts: Sison, et al, assailed the constitutionality of Batas Pambansa 135 amending the National Internal Revenue Code which provides for different tax rates based on different types/classifications of income earners. Sison contended that he would be unduly discriminated with the imposition of higher rates of tax upon his income arising from the exercise of his profession as against those who have fixed income or salaries. Ancheta, BIR Commissioner, however contends that BP 135 is a valid exercise of taxing power.
Issue: Whether or not Batas Pambansa 135 is constitutional.
Ruling: BP 135 is constitutional, it being a valid exercise of the State's taxing power.
To avoid denial of due process and equal protection, it suffices that laws operate equally and uniformly on all persons/subjects under similar circumstances or that all persons be treated in the same manner, the conditions not being different both in the privileges conferred and liabilities imposed. Equal protection and security shall be given to every person under circumstances which, if not identical, are analogous. Those that fall within the class should be treated in the same fashion. In the exercise of taxation, the state is free to choose the subjects. Inequalities which may result from the singling out a particular class infringe no constitutional limitations. Taxpayers ,may be classified into different categories and it is enough that the classification rest upon substantial distinctions that make real differences.
D. Basco v. PAGCOR, 197 SCRA 52
Facts: PAGCOR, a government owned and controlled corporation, is exempted by its charter from payment of all kinds of taxes except for 5% franchise tax. Petitioners assail the grant of such exemption on the ground that it infringes on the right of the City of Manila to impose local fees and taxes.
Issue: Whether or not PAGCOR which is exempted by its charter from payment of all kinds of taxes except for the 5% franchise tax, is subject to the local fees and taxes imposed by the City of Manila.
Ruling: The taxing power of local government units must always yield to an act of Congress. Local government has no inherent power of tax but merely derives such power from Congress. In fact, local government units have no power to tax instrumentalities of the National Government.
Under its charter, PAGCOR is empowered to operate and regulate gambling casinos. With its regulatory power, it becomes an instrumentality of the National Government and hence, entitled to exemption from local taxes.
E. Pascual v. Sec. of Public Works, 110 Phil. 331
Issue: Whether or not incidental benefits that may be derived by the public is sufficient basis to validate the appropriation.
Ruling: Legislature is without power to appropriate public revenue for anything but for public purpose. Incidental advantage to the public or to the State which results from the promotion of private enterprises or business does not justify their aid by the use of public money. Where, for instance a land on which projected feeder roads are to be constructed belong to private persons, an appropriation made by Congress for that purpose is null and void, and a donation to the Government for the purpose of giving a semblance of legality to the appropriation does not cure the basic defect.
12.1 On March 28, 1995, the Commission on Audit (COA) promulgated COA Resolution No. 95-208 asserting the power, authority, and duty of the Commission on Audit to examine, audit, and settle all accounts pertaining to the revenues and receipts of government agencies and subdivisions, including those of the Bureau of Internal Revenue (BIR), the Bureau of Customs, the government-owned and/or controlled corporations, and all local government units. Specifically, the Resolution authorises CO A auditors to: (a) evaluate the internal controls of the revenue administration system of the agency; and (b) review the assessment records, collection reports, and other accounting records for the purpose of determining whether revenues are properly assessed, collected and accounted for in accordance with laws and regulations.
12.2. The BIR Commissioner however did not agree. To her, the resolution is an encroachment by COA on the exclusive authority of the BIR to assess and collect taxes. Consequently, on May 10, 1995, the BIR Commissioner filed a petition with the Supreme Court to set aside COA Resolution No. 95-208.
12.3. The main issue of the case is whether or not the COA acted with grave abuse of discretion amounting to lack or excess of its jurisdiction in asserting its power, authority and duty to examine, audit and settle all accounts pertaining to the revenues and receipts of the BIR.
12.4. In its answer to the petition, the Commission on Audit made the following assertions in defence of the Resolution; viz:
12.5. The case however is still pending resolution by the Supreme Court although COA, notwithstanding the temporary restraining order issued against it, is very optimistic that the Court will finally resolve the case in its favour.
13.1. In the Bureau of Internal Revenue (BIR) which is the highest revenue earner of the Government, tax deductions and exemptions which are claimed by taxpayers in the income tax returns are at present not being audited by the COA because of the Temporary Restraining Order issued by the Supreme Court as a result of a case being filed by the BIR against COA.
13.2. Likewise, Tax Credit Certificates (TCC) are not being audited since these are not recorded in the books of accounts. However, COA is now in the process of issuing accounting guidelines/procedures on the issuance, utilisation/redemption and reporting of TCCs and Tax Incentive Certificates.
13.3. Unlike the BIR, the Bureau of Customs has allowed the COA auditors access to all revenue records, hence tax exemptions and tax credits are being audited.
13.4. Presently, there is no existing system of costing tax expenditures. Moreover, there is no record available to determine the total tax expenditures for a given period in order to evaluate the effectiveness of taxation provisions.
14.1. The Philippine Government follows the Common Effective Preferential Tariff (CEPT) Scheme for the Asean Free Trade Area (AFTA). It also adopts the Harmonised Commodity Description and Coding System.
A. Intra-Departmental Accountability Through Internal Control Systems
15.1. The revenue administration system has four components such as assessment, collection, remittance/deposit, and recording. The head of the agency, who is primarily responsible for all government funds and property pertaining to his agency, ensures that all revenues are correctly and promptly assessed, collected and credited to the appropriate funds. The Commission on Audit (COA), on the other hand, ascertains that adequate controls are installed to prevent the commission of irregularities at various stages of assessment, collection and accounting. In the event an agency head, or any public officer for that matter, refusing to give COA auditors access to public records which are in his custody and essential in the conduct of the audit, the Commission on Audit through the Commission Proper may hold him in contempt. The Commission may, if the situation warrants, also file a case against the official concerned for violation of the provisions of the Anti-Graft and Corrupt Practices Act. It may further institute administrative disciplinary action either with the Civil Service Commission under the Civil Service Law, or with the Presidential Commission Against Graft and Corruption.
15.2.1. In the Bureau of Internal Revenue, assessment or tax audit is conducted by the Revenue District Office after income tax returns have been filed and the corresponding taxes have been paid. Dockets of reports of investigation include a duly accomplished "Revenue Officer's Audit Report" which is submitted to and reviewed by the Assessment Division in the Revenue Regions for regional cases falling within their respective jurisdictions, and by the Intelligence and Investigation Service for cases falling under the Tax Fraud Division.
15.2.2. Assessment may be protested administratively by filing a request for reconsideration or reinvestigation. If the protest is denied in whole or in part, the individual, association or corporation adversely affected by the decision on the protest may appeal to the Court of Tax Appeals within 30 days from receipt of the said decision; otherwise, the decision shall become final, executory and demandable.
15.2.3. The Commissioner of Internal Revenue may compromise the payment of any internal revenue tax when a reasonable doubt as to the validity of the claim against the taxpayer exists or when the financial position of the taxpayer demonstrates a clear inability to pay the assessed tax: provided, however, that final assessments issued against large taxpayers shall be subject to the approval of the Secretary of Finance.
15.2.4. Changes in the rates of internal revenue taxes and other revenues are approved by the Department of Finance (DOF) but such changes should not exceed what is required by law.
15.2.5. In the Bureau of Customs, assessment is done before payment of taxes and duties, and release of the goods. The assessment division/unit is responsible for ensuring that revenues are properly assessed. Assessments made by the tax examiners are reviewed and scrutinised by the customs collectors/officers to ascertain the correctness of the taxes/duties due.
15.2.6. A change in tariff rates should be made by the Tariff Commission but such change in rates should be in accordance with existing laws. However, changes in the rates of other revenues are approved by the DOF.
15.2.7. In the interest of national economy, general welfare and/or national security, the President of the Philippines, upon recommendation of the National Economic Development Administration (NEDA) is empowered: (1) to increase, reduce or remove existing protective rates of import duty; (2) to establish import quota or to ban imports of any commodity as may be necessary; and (3) to impose an additional duty on all imports not exceeding 10% ad valorem whenever necessary.
15.2.8. In the Local Government Units, the Assessor's Office is responsible for the assessment of real property taxes. This is being done before payment of the tax has been made. Assessments made by the assessment clerks are reviewed by the Assessor to ascertain correctness of the taxes due. A change in the rates of taxes is made through the issuance of an ordinance but it should not exceed what is required by law.
15.2.9. On the other hand, the Commission on Audit determines whether revenues are correctly assessed in accordance with laws, rules and regulations. It should also ascertain that methods of assessment provide protection against error and irregularity.
15.3.1. The Collection Division, Cash Division or Treasurer's Office is responsible for the efficient collection of revenues due to the government. Revenues are collected either by the agency's collecting officers, accredited agent banks or by other authorised government agencies. Collections are acknowledged by official receipts or through machine- validation. The collection performance is closely monitored by the head of office or the chief executive.
15.3.2. The revenue-generating agencies including the local government units are responsible for the attainment of the revenue targets set by them and approved by the Department of Finance.
15.3.3. The Commission on Audit, on the other hand, determines whether revenues including fines and penalties are collected when due, properly receipted, and accounted for. It likewise determines the reasonableness of the revenue targets, and the reported collection efficiency.
15.4.1. The Collection Division, Cash Division or Treasurer's Office is likewise responsible for ensuring that all revenues collected by the collection agents/officers are remitted/deposited intact. These remittances/deposits are duly covered by validated deposit slips. However, remittances made by accredited agent banks to the National Treasury through the Bangko Sentral ng Pilipinas are evidenced by duly approved Credit Advices. Remittances/deposits are also closely monitored.
15.4.2. The Bureau of the Treasury under the Department of Finance accounts and regularly reports all remittances received.
15.4.3. On the other hand, it is the duty of the Commission on Audit to determine whether all revenue collections are remitted/deposited in accordance with existing rules and regulations.
15.5.1. Proper recording of revenues to the appropriate books of accounts is the primary responsibility of the Accounting Division. Submission of the required collection reports together with all the supporting documents are closely monitored. These reports are processed before these are summarised and classified in the books of accounts. Collections and remittances/ deposits are regularly reconciled to ascertain reliability of the account balances.
15.5.2. The duty of the Commission on Audit is to ascertain that all transactions pertaining to revenues are properly recorded in the appropriate books of accounts.
B. LEGISLATIVE ACCOUNTABILITY
15.5.3. Deficiencies noted by the auditors in the revenue-generating operations of the agencies/departments are summarised in the Audit Reports, copies of which are submitted to the Legislative Body (Congress) for evaluation. The revenue-generating agencies concerned are, therefore, required to explain/justify the deficiencies noted, and implement the recommended courses of action to improve the efficiency and effectiveness of their operations.
16.1. As stated earlier, taxes are collected either through agency's own collecting officers, accredited agent banks or through other authorised government agencies. Collections made by the collecting officers and other government agencies are acknowledged by official receipts. However, the bulk of revenues which are collected by the accredited agent banks are acknowledged through machine-validation.
16.2. The collecting officers and the authorised government agencies remit their collections direct to the National Treasury or through authorised government depository banks. These remittances are covered by validated deposit slips. However, the accredited agent banks remit their tax collections by advising the Central Bank of the Philippines to debit their demand deposit and credit the Savings Account of the Treasurer of the Philippines. These remittances are evidenced by a Credit Advice issued by the Central Bank.
16.3. The Local Governments, on the other hand, deposit their revenue collections with their respective depository banks.
16.4. The double entry bookkeeping system is being adopted in accounting. Revenue collections are summarised first in the covering collection reports before they are recorded in the journals and posted to the ledgers.
16.5. Presented hereunder, in percentages, are tax collections of the national government agencies and the local government units from 1992 to 1995.
|Documentary stamp taxes||4%||5%||3%||3%|
|Motor vehicle tax||1%||1%||1%||-|
|Real property taxes||15%||14%||15%||19%|
|Business taxes & licenses||9%||10%||9%||10%|
|Share in internal revenue collections||70%||72%||63%||67%|
17.1. The BIR is still in the process of test-implementing the whole component of a proposed computerised integrated tax system (ITS) in selected BIR regional offices. This ITS will support the BIR in servicing taxpayers in the areas of: registration, returns processing, collections and bank reconciliation, case monitoring, returns compliance, taxpayer accounting, tax reconciliation, tax credits, taxpayer's audit, and accounts receivable.
17.2. The BOC, on the other hand, has adopted the Automated Systems for Customs Data (ASYCUDA ++), a software package on customs administration and is completing the customisation or tailor- fitting of that system to their requirement. They had recently implemented selected modules of ASYCUDA ++ and some in-house developed systems (assessment, collection, bank reconciliation and release of goods) at the Port of Manila.