LAW OF BASIC TAXATION IN THE PHILIPPINES: or proof thereof, said qualifications may be certified to under oath by the managing partner of the firm: and 2, The partnership is one registered with the Securities and Exchange Commission. ¢. In the ease of incorporated entities engaged in accounting and tax consultancy other than general professional partnerships: 1, The firm must be registered with the Securities and Exchange Commission; and 2, The applicant-officers or duly authorized representatives thereof must meet all the prescribed qualifications of an individual tax agent. H. Imposition of Additional Procedural or Documentary Requirements - Sec. 6(H) of the Tax Code authorizes the Commissioner to prescribe the manner of compliance with any documentary or procedural requirements in connection with the submission or preparation of financial statements accompanying tax returns. Through these requirements, accurate assessments are likewise enhanced since they assure the influx of correct data as basis for tax assessments. THE NET WORTH METHOD. The basis of using the'net worth method of investigation is Revenue Memorandum Circular No. 43-74. ‘This method of investigation, otherwise known as “inventory method of income tax verification” is a very effective method of determining taxable income and deficiency income tax due from a taxpayer. Some important considerations regarding the use of this method are as follows: 1. Its basic concept and theory - The method is an extension of the basic accounting principle: assets minus liabilities equals net worth. ‘The taxpayer's net worth is determined both at the beginning and at the end of the same taxable year. The increase or decrease in net worth is adjusted by adding ail non-deductible items and subtracting therefrom non-taxable receipts. The resultant figure is the taxable net income before statutory personal and additional exemptions. The general theory underlying this method is that the taxpayer's money and other assets in excess of liabilities after accurate and proper adjustment of non-deductible and non-taxable items not accounted for in his tax return is deemed to be unreported income. Otherwise stated, the theory is that the unexplained increase in net worth of a taxpayer is presumed to be derived from taxable sources. 188 ‘TAX ADMINISTRATION AND ENFORCEMENT 2. The legal source of authority for its use - The Commissioner's authority to use the net worth method and other indirect methods of establishing taxable income is found in Sec. 37 (now, Sec. 43, 1997 ‘NIRC), which provides in part: “The taxable income shaill be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of sueh taxpayer; but ifno such method of accounting has been employed, or ifthe method employed does not clearly reflect the income, the computation shall be made in accordance with the method as in the opinion of the ‘Commissioner clearly reflects the income.” This authority has been upheld by the courts in a long line of cases, notable among which is the leading case of Perez v. CTA, et al. (103 Phil. 1167 [Unrep.]). The method is a practical necessity if a fair and efficient system of collecting revenue is to be ‘maintained. Moreover, Sec. 16(b) (now, Sec. 6[B], 1997 NIRC), provides for a broad and general investigatory power to assess the proper tax on the best evidence obtainable whenever a report required by law as basis for the assessment of any national internal revenue tax shalll not be forthcoming within the time fixed by law or regulation, or when there is reason to believe that any such report is false, incomplete or erroneous. 3. Conditions for the Use of the Net Worth Method - The application of the net worth method is not without limitations. The conditions for the proper use of such method is found in the law itself, and the case law developed on the matter are: (a) That the taxpayer's books of accounts do not clearly reflect his income, or the taxpayer has no books, or if he has books, he refuses to produce them; (b) That there is evidence of a possible source or sources of income to account for the increases in net worth or the expenditures; () That there is a fixed starting point or opening net worth, i.e., a date beginning with a taxable year or prior to it, at which time the taxpayer's financial condition can be affirmatively established with some definiteness; and (@) That the circumstances are such that the method does reflect, the taxpayer's income with reasonable accuracy and certainty and proper and just additions of personal expenses and other non-deduetible expenditures were made and correct, fair and equitable credit, adjustments were given by way of eliminating non-taxable items. 189