By Tata D. Panlilio-Ong
It has often been said that taxation is the lifeblood of the nation. Indeed, the exercise of the power of taxation is necessary to raise government revenues to fund its economic and social programs, and to deliver public services and a myriad of other things that are essential for the workings of government.
The importance of taxation is highlighted by the fact that, for 2007, tax revenues constituted 14% of the country’s gross domestic product.
The Bureau of Internal Revenue (BIR) has been under constant pressure to meet its collection goals. In 2008, the BIR was tasked to collect P845 billion. For this year, the BIR is expected to collect about P968 billion, or an additional P123 billion in tax revenues.
The increase in revenue target is prompted by the government’s plan to stimulate the economy and cushion the adverse effects of the deepening global economic crisis through higher public spending.
In its effort to increase its revenue take, the BIR has to contend with the impact on revenues of laws exempting minimum wage earners from tax and increasing the allowable deductions from individual income tax; reduction of the corporate income tax rate from 35% to 30% beginning January 1, 2009; falling corporate profits and a contracting economy.
To step-up its collection, newly appointed BIR Commissioner Sixto S. Esquivias IV recently issued an order expanding the large taxpayer’s base.
Moreover, fiscal authorities have proposed several tax enhancement measures — restructuring "sin" taxes and rationalizing fiscal incentives, among others.
Moreover, fiscal authorities have proposed several tax enhancement measures — restructuring "sin" taxes and rationalizing fiscal incentives, among others.
However, with the upcoming political season, it is highly unlikely for legislators to act swiftly on the passage of these tax proposals.
Faced with mounting pressure to collect more taxes, the BIR will, once again, rely on a tool that it frequently utilizes to meet its revenue goals, namely: issuing assessments for tax deficiencies.
Faced with mounting pressure to collect more taxes, the BIR will, once again, rely on a tool that it frequently utilizes to meet its revenue goals, namely: issuing assessments for tax deficiencies.
A perusal of Section 228 of the 1997 Tax Code (Protesting an Assessment), as implemented by BIR Revenue Regulation (RR) 12-99, indicates that the procedures outlined therein are anchored on the constitutional principle that "[N]o person shall be deprived of property without due process."
Basically, the procedures for protesting an assessment entail the following:
a. issuance of notice for an "informal conference," informing the taxpayer of the revenue examiner’s findings;
b. if the taxpayer fails to respond within 15 days, issuance by the Assessment Division of a Preliminary Assessment Notice (PAN) indicating the facts and law on which the assessment is based;
c. if the taxpayer fails to respond within 15 days, issuance of a formal letter of demand (FLD) and assessment notice calling for payment of the deficiency tax and applicable penalties — The letter of demand shall state the facts, law, rules and regulations, or jurisprudence on which the assessment is based; otherwise, the FLD and assessment notice shall be void;
d. submission by the taxpayer of his protest within 30 days and submission of supporting documents within 60 days thereafter — If the taxpayer fails to submit supporting documents or to file a valid protest within the prescribed period, the assessment shall become final and executory;
e. If the protest is denied, in whole or in part, the taxpayer can either appeal to the Court of Tax Appeals (CTA) within 30 days; otherwise, the assessment shall become final and executory; or protest to the BIR Commissioner within 30 days. The decision of the Commissioner shall state the facts, applicable law, rules and regulations, or jurisprudence on which such decision is based; otherwise, the decision shall be void.
f. If the Commissioner fails to act on the protest within 180 days, the taxpayer can appeal to the CTA within 30 days from the laps e of the 180-day period; otherwise, the assessme nt shall become final and executory.
Des pi te the clear tenor of the above provisions, there are numerous decisions by the CTA that accord a liberal interpretation.
Des pi te the clear tenor of the above provisions, there are numerous decisions by the CTA that accord a liberal interpretation.
In essence, these decisions involved FLDs or final assessment notices (FANs) where the deficiency taxes were computed by comparing sales or expense items in the income tax return (ITR) with the audit findings of the revenue examiner. Where there are discrepancies, deficiency taxes are assessed. Where income payments are not subjected to withholding tax (or a different tax rate was used), the same are disallowed as deductions from income tax.
Invoking the foregoing provisions, the taxpayer argued that the assessments are void because the same merely contained computations and brief explanations on how deficiency taxes are arrived at.
In dismissing the taxpayer’s contention, the CTA argued that the purpose of Section 228 of the 1997 Tax Code "is to give the taxpayer the opportunity to refute the findings of the examiner and give a more accurate and detailed explanation regarding the assessments."
"If this purpose is served in the process of issuing an assessment, then the provision is deemed to have been complied with. The CTA cited the fact that the taxpayer had already been informed of the bases of the assessments during the informal conference or in the course of clarifying issues during the PAN stage. The CTA emphasized that "there was substantial compliance because the taxpayer petitioner was able to protest the assessments intelligently, thereby implying that it had actual knowledge of the factual and legal bases of the assessments. xxx Parenthetically, in whatever form and manner, as long as the taxpayer is informed of how the assessment was arrived at, then Section 228 has not been violated."
Now then, the taxpayer seems to have found an ally in the Supreme Court (SC). In a recently issued decision, the SC annulled the FAN issued by the BIR against a power generation company for its failure to state the legal and factual bases of its assessment. The Court took note of the findings of the CTA (which, in this instance, departed from its previous decisions and cancelled the assessment) and the Court of Appeals affirmed that the BIR "merely issued a formal assessment and indicated therein the supposed tax, surcharge and compromise penalty due thereon xxx. The FAN only itemized the deductions disallowed and included the same in the gross income and imposed the preferential tax rate without providing the factual and legal grounds on which the assessment is based."
The SC noted that the use of the word "shall" in Section 228 of the 1997 Tax Code "indicates the mandatory nature of the requirements laid down therein." It did not give credence to the argument of the BIR that the taxpayer was apprised of its tax deficiency through a preliminary five-day letter and that it was furnished a copy of the audit papers. The Court emphasized that these actions "were not valid substitutes for the mandatory notice in writing of the legal and factual bases of the assessment."
"These steps were mere perfunctory discharges of the BIR’s duties in correctly assessing a taxpayer. xxx The law requires that the legal and factual bases of the assessment be stated in the formal letter of demand and assessment notice. Thus, such cannot be presumed."
That taxation is a vital component of national growth and development is not lost on most taxpayers. But any taxpayer who has gone through the grueling process of protesting an assessment knows that the agony can somewhat be diminished if assessments for deficiency taxes clearly provide the factual circumstances and relevant tax laws and rules that support the assessment.
For its part, the tax authorities would fare better in their collection efforts if they would issue assessment notices that strictly comply wit h the above requirements which are provided in the relevant an nexes to BIR RR 12-99. In so doing, the tax authorities w ould be heeding the SC’s explicit pronouncement that "[V]erily, taxes are the lifeblood of the Government and so should be collected without unnecessary hindrance. However, such collection should be made in accordance with law as any arbitrariness will negate the very reason for the Government itself."
This article is not intended to be a substitute for professional advice. For comments and inquiries, you may e-mail the author at Tata.Panlilio@ph.gt.com. For other tax concerns, please check out our other tax services.
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