• Due process in BIR tax assessments



    As the Bureau of Internal Revenue (BIR) intensifies its focus on enforcement and audits, we may wonder, do taxpayers understand the tax assessment process and their rights and remedies under the law, particularly the due process available to them?

    In the case of Dakay Construction and Development Corporation vs Commissioner of Internal Revenue (CIR), CTA EB 1294, September 20, 2016, the Court of Tax Appeals (CTA) ordered the cancellation of the assessment against the taxpayer considering that the assessments were issued without the necessary authority.

    Under Revenue Memorandum Order (RMO) No. 43-90, all audits/investigations should be conducted under a Letter of Authority (LOA). In relation to this, Revenue Audit Memorandum Order (RAMO) No. 01-00 requires that the LOA be served or presented to the taxpayer within 30 days from its date of issue. Otherwise, the LOA becomes null and void, unless revalidated.

    In the instant case, the LOA was served to the taxpayer three days after the 30-day period prescribed under RAMO 01-00 lapsed. The taxpayer argued that the issuance of the LOA as basis for assessing the taxpayer is void on the grounds that the taxpayer received the LOA beyond 30 days from the date of its issuance.

    The CTA held that the RMOs clearly mandate that an audit should be conducted under an LOA and that it must be served on the subject taxpayer within 30 days from date of issue lest the authority becomes null and void. According to the CTA, the terms “must”, “shall”, and “should” are couched in terms that impose a duty that is imperative and mandatory in nature. Thus, a deviation from these obviously renders the result of the audit and examination defective.

    In the case of Freelife Philippines Distribution, Inc. Philippine branch vs Hon. Kim S. Jacinto-Henares in her capacity as CIR, CTA Case No. 8838, April 27, 2017, the CTA held that the Formal Letter of Demand (FLD) and the assessment notices, being fatally infirm, are void considering the palpable violation of the taxpayer’s right to procedural due process.

    It should be noted that under Section 228 of the Tax Code, as implemented by Revenue Regulations (RR) No. 12-99, as amended, a taxpayer who receives the Preliminary Assessment Notice (PAN) is given 15 days from receipt of the PAN to file its reply to the PAN. If the 15-day period lapses without any response from the taxpayer, the taxpayer shall be considered in default, and a Formal Letter of Demand (FLD) and Final Assessment Notice (FAN) shall be issued.

    In the above case, the taxpayer received a copy of the PAN from the BIR dated December 17, 2010 on January 3, 2011. The taxpayer had 15 days, or until January 18, 2011, within which to file a reply or protest against the PAN. Prior to the lapse of the 15-day period within which the taxpayer could respond to the PAN, it received the FLD dated January 7, 2011, and Assessment Notices on January 17, 2011. Notably, the BIR did not even wait for the taxpayer to reply to the PAN before issuing the FLD and the Assessment Notices on 7 January 2011.

    According to the CTA, procedural due process is not satisfied with the mere issuance of a PAN, without giving the taxpayer an opportunity to respond to the PAN.

    The CTA maintained that although the taxpayer was given ample opportunity to contest the FLD and assessment notices, the fatal infirmity that attended its issuance prior to the lapse of the period to respond to the PAN is not cured by the opportunity accorded to the taxpayer to protest the FAN/FLD. The CTA cited the case of Pilipinas Shell Petroleum Corporation vs CIR (GR No. 172598, December 21, 2007), where the Supreme Court (SC) ruled that non-compliance with statutory and procedural due process renders the FAN null and void.

    How about the absence of the period to pay the deficiency tax in assessments?

    In a recent CTA case entitled, CIR vs Derek Arthur P. Ramsay, CTA EB 1413, June 22, 2017, the CTA held that in order to be valid, the FLD issued to the taxpayer should not only contain a computation of tax liabilities but also a demand for payment within a prescribed period.

    In relation to this, the CTA cited the case of CIR vs Menguito (GR No. 167560, September 17, 2008), where the SC ruled that the issuance of a valid formal assessment is a substantive prerequisite to tax collection. That is because it contains not only a computation of tax liabilities but also a demand for payment within a prescribed period, thereby signaling the time when penalties and interests begin to accrue against the taxpayer, enabling the latter to determine his remedies for such financial strain.

    Upon perusal of the FLD issued to the taxpayer, the CTA noted that while the FLD contains the computation of the supposed tax liabilities of the taxpayer, there is no fixed date when payment should be made. Instead, the FLD merely states that the payment be made “within the time shown in the enclosed assessment notice.”

    The CTA held that the statement did not amount to a valid assessment as it failed to state a definite time when the supposed tax liabilities were due and demandable. This is especially true in this case since, as already determined, the subject assessment notices were not served to the taxpayer. Since there was no showing that the FLD issued against the taxpayer contains a prescribed period for the payment of the supposed deficiency tax, the CTA held that the FLD issued to the taxpayer is void.

    Going through a BIR tax assessment may be a nightmare or a challenging experience for many, but armed with an awareness of the proper remedies and the right amount of preparation and know-how, a taxpayer can survive a tax audit. Although it is recommended that taxpayers obtain the services of tax professionals, knowing the basic procedures in handling tax assessments provides an advantage.

    The author is a director with the Tax & Corporate Services division of Navarro Amper & Co., the local member firm of Deloitte Southeast Asia Ltd. – a member firm of Deloitte Touche Tohmatsu Limited – comprising Deloitte practices operating in Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.


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