• A favorable comeback: Restoring past rules in tax assessment



    As we welcome the Chinese New Year, it may be a celebration for taxpayers as well in matters of changes in the Bureau of Internal Revenue’s (BIR) regulations on tax investigations or audits.

    Five years ago, the BIR issued Revenue Regulations (RR) 12-2013 amending Section 2.58.5 of RR 2-98, which strictly provides that no deduction of expenses is allowed on the gross income of the taxpayer — notwithstanding payments of withholding tax at the time of the tax investigation/audit or reinvestigation/reconsideration — in cases when no withholding of tax was made on the taxpayer’s income payments/expenses during the applicable taxable year.

    In 2013 as well, the BIR issued RR 18-2013 amending RR 12-99, which removed the issuance of Notice of Informal Conference as part of the due process requirement in the issuance of a deficiency tax assessment. Clearly, these two issuances were a big blow to all taxpayers, especially those undergoing tax investigations.

    Fortunately, much to the relief of taxpayers, the said regulations were retracted through the issuances of RRs 6-2018 and 7-2018 this January 2018.

    Deductibility of expenses upon payment of withholding tax
    RR 6-2018 reinstates Section 2.58.5 of RR 2-98, as amended by RRs 14-2002 and 17-2003. Based on the re-established rule, expenses incurred in a given taxable year are allowed to be deducted provided that the corresponding withholding tax is remitted to the BIR, notwithstanding that such remittance is made belatedly during the tax investigation.

    It is worth mentioning that Section 34(K) of the National Internal Revenue Code of 1997, as amended, is the governing law that mandates the additional requisite that an expense or cost shall be allowed as a deduction only if the tax required to be deducted and withheld has been remitted to the BIR in accordance with Sections 34, 58 and 81 of the Tax Code. Therefore, the payment of withholding taxes during tax audit/investigation or reinvestigation/reconsideration, as a result of under/non-withholding of taxes, will satisfy the condition of Section 34(K) of the Tax Code for income tax purposes. Taxpayers will be relieved of paying the additional 30 percent deficiency tax due to disallowance of expenses not subjected to withholding during tax audit/investigation or reinvestigation/reconsideration.

    There are, however, questions in the mind of taxpayers that should be answered by the tax office immediately. One of which is: does RR 6-2018 include all existing assessments or only those that are yet to be issued assessment notices by the BIR?

    Restoration of Notice of Informal Conference (NIC)
    RR 7-2018, meanwhile, amended Section 3 of RR 12-99 to include Section 3.1.1 for the issuance of Notice of Informal Conference (NIC) prior to the issuance of a PAN.

    As part of the re-introduced tax assessment’s due process requirements, the Revenue District Office/Special Investigation Division/Chief of Division of the National Office, as applicable, shall be informed in writing of the discrepancies noted during the audit/examination of books and accounting records of a taxpayer by the Revenue Officer and Group Supervisor assigned to the case. This is called an “informal conference”, which provides the taxpayer an opportunity to present his arguments on the findings of the tax audit. However, the informal conference shall last for only 30 days upon the taxpayer’s receipt of the NIC.

    Upon cessation of the NIC, the remaining findings on the tax audit/examination shall be endorsed to the Revenue District Officer/Chief of Special Investigation Division of the Revenue Region/Chief of Division of the National Office, as applicable, within seven days.

    With this revived rule, revenue officers are mandated to issue an NIC and allow the taxpayers to provide arguments and support for contested findings before releasing the assessment notices. Thus, unnecessary and unjustified assessments, which are burdensome for taxpayers, can be avoided.

    Further, the amended Section 3.1.1 of RR 12-99 now provides a 30-day period to finalize the informal conference. Prior to RR 18-2013, a taxpayer was required to respond within 15 days upon receipt of the NIC, otherwise the revenue district officers can already endorse the case to the Assessment Division of the Revenue Regional Office, to the Commissioner, or to his duly authorized representative, as the case may be, for appropriate review and issuance of deficiency tax assessments. It could be observed before that upon submission of response to the NIC by the taxpayer, there were no specified regulations to limit the period of informal conference.

    A similar question arises as to the 30-day period for informal conference specified in RR 7-2018. Careful reading of the said regulations connotes that the revenue officers are the ones bound to comply with the 30-day period without regard as to when the taxpayer can provide support on the arguments of the tax audit and as to the review of the revenue officers on the provided documents by the taxpayers. Clearly, there should be a specified period as to when the taxpayers should respond to the NIC, so that revenue officers have ample time to verify and evaluate the contentions raised by the taxpayers during the informal conference. Otherwise, since the revenue officers are still bound to comply with the 30-day period, there is a possibility that the response submitted by the taxpayers to contest the findings during the informal conference will not be considered.

    It is understandable that the beginning of 2018 is a challenging period for the BIR, and for taxpayers as well, due to the implementation of Republic Act 10963 (Tax Reform Acceleration and Inclusion, also known as the TRAIN Law). But it shouldn’t hamper clarificatory issuances on the re-institution of assessment rules and regulations by RRs 6-2018 and 7-2018, which nonetheless are steps towards the improvement of our current tax assessment procedures. As the New Year brings hope to everyone, taxpayers are also optimistic that these changes will simplify the landscape of administrative assessments.

    The author is a senior 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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