• No PAN intended: Instances when assessments are void



    Taxes are the government’s lifeblood. They are the primary source of funds for its operation and for the disposal of governmental functions meant to promote the people’s welfare. One way of ensuring that there is constant inflow of income is through tax collections, but such collections should be made in accordance with the law and must be correctly demandable from the taxpayer.

    The Bureau of Internal Revenue (BIR) has the right to conduct tax assessment or audit within three years from the date of filing of the tax return, or within 10 years from the discovery of tax fraud.

    The BIR imposes strict revenue collection policies in actively handling and discharging assessment cases through a Letter of Authority (LOA), which is every company’s nightmare.

    As part of the tax assessment process, a taxpayer is required to submit all the documents listed on the LOA. Once the BIR finishes the examination of the submitted documents, it will release the Preliminary Assessment Notice (PAN), to which the taxpayer has 15 days to respond, albeit optional.

    Serving the PAN is among the critical elements for the validity of tax assessments, along with giving a taxpayer due process “to be heard and submit any evidence one may have in support of one’s defense.” What every taxpayer needs to look out for is the due process requirement in serving assessment notices as provided by Section 3 of Revenue Regulations (RR) No. 12-99. Bear in mind that protest against PAN is not mandatory, unlike protest against FAN (Final Assessment Notice). As such, non-protest against PAN shall not make it final and non-appealable.

    The following are some of the interesting cases that rendered assessments invalid at the early stage, which taxpayers may take note of to validly avoid possible tax liability:

    Failure to observe the 15-day period to protest the PAN and for issuance of FAN prior to receipt of PAN violates due process, which is tantamount to pre-judgment that the taxpayer is liable to pay the alleged deficiency taxes. Thus, subject assessment is void. (Commissioner of Internal Revenue [CIR] v. Apex Chemical Corporation, Court of Tax Appeals [CTA] EB Case No. 1382 re CTA Case No. 8698, October 14, 2016)

    FAN issued by the BIR even before the lapse of the 15-day period within which the taxpayer could file a reply or protest to PAN is void. Since fairness was ignored by the BIR when it gave no opportunity for the taxpayer to argue its contentions, the CTA cancelled the FAN for violating the taxpayer’s right to due process. (Missouri Square Inc. v. CIR, CTA Case No. 8707, September 8, 2016)

    Denial of due process due to non-service of PAN. Aside from the testimony of the BIR witness that the PAN was properly sent to the taxpayer, no proof was presented to support the BIR’s claim that the PAN was indeed received by the taxpayer. Thus, the Formal Letter of Demand (FLD) and FAN issued to the taxpayer were deemed void. (Bloat and Ogle, Inc. v. CIR, CTA Case No. 8682, September 2, 2016)

    Constructive service of PAN and FLD covering 2005 and unverified prior years to an employee witnessed by barangay officials is not valid as it did not meet the provisions of Section 3.1.7 of RR 12-99. Noting that serving of the PAN and FLD were attested by barangay officials instead of revenue officers, CTA en banc held the assessment notices void. (People of the Philippines v. Edwin T. So, Raymond R. Lee, Techpoint Computer Corporation, CTA EB Crim. Case No. 028 dated March 6, 2015). The rules on constructive service have been amended by RR 18-2013, stating that it may now be attested to by a barangay official and two disinterested witnesses who are persons of legal age other than employees of the BIR. However, since the law does not provide retroactive application, provisions of RR 18-2013 cannot be applied prior to its effectivity.

    Further, in the case of CIR v. Metro Star Superama, Inc. dated Dec. 8, 2010, the Supreme Court ruled that failure to strictly comply with the notice requirements prescribed under Section 228 of the Tax Code, as amended, and RR 12-99, is a denial of due process, rendering the assessment nugatory. This holds regardless of the CTA’s ruling in 2015 wherein it held that issuance of the FAN before the lapse of the 15-day period to protest the PAN does not inflict prejudice on the taxpayer because protest to PAN is not indispensable. Nevertheless, it would be safe for every taxpayer to respond to the PAN within the reglementary period and include denial of due process in the protest, if any, although a void assessment bears no fruit.

    On the other hand, taxpayers cannot fault the BIR if the FAN is issued immediately after filing of the protest letter following the 15-day period the law allows. The CTA already held that there is no deprivation of due process since the taxpayer was given the chance to contest the BIR’s preliminary findings.

    Taxpayers may find these technicalities beneficial to them, and absurd on the part of the BIR. But these provide the taxpayers assurance that the law grants them opportunities to defend themselves, notwithstanding that an assessment based on estimates is deemed prima facie valid and lawful because the burden of proof for demonstrating otherwise lies on the taxpayer.

    With everything said, taxpayers are advised to prepare regular reconciliations of their records, preserve books of accounts and other accounting records, create, develop and/or maintain an effective accounting system, and consult external tax consultants, if necessary, in preparation for a tax audit.

    One can only hope to receive an assessment based on factual information and be given an opportunity to contend the alleged deficiencies, especially since virtually no taxpayer escapes payment of liability from the tax office.

    The author is a Senior Associate with the Tax & Corporate Services division of Navarro Amper & Co., the local member firm of Deloitte Southeast Asia Ltd. The Southeast Asian operation is part 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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