There is some confusion among taxpayers regarding the imposition of the 50 percent surcharge on assessments made by the Bureau of Internal Revenue (BIR). Some may not be aware that the imposition of the 50 percent surcharge connotes the existence of fraud, that is, a willful neglect and deliberate act to evade taxes.
The Court of Tax Appeals (CTA) is being circumspect when it comes to cases involving fraud. In one of the recent CTA en banc cases, Tulay Sa Pag-Unlad, Inc. vs Commissioner of Internal Revenue (CTA en banc No. 1478 re CTA Case No. 8480 dated Sept. 15, 2017), the CTA in division modified its earlier decision to uphold the 50 percent surcharge of the BIR, and reduced it to 25 percent as there was no clear and convincing proof that the taxpayer’s failure to file its tax returns was done willfully and deliberately.
According to the CTA en banc, the facts show that the taxpayer erroneously believed it was not subject to value-added tax (VAT) and documentary stamp tax (DST). The CTA en banc held that at most, only negligence or mistake may be imputed to the taxpayer for not ascertaining the need to file returns. Negligence, whether slight or gross, is not equivalent to fraud with intent to evade tax contemplated by the law.
As regards to the Commissioner of Internal Revenue (CIR)’s contention that the final assessment notice (FAN) for deficiency VAT and DST containing the imposition of 50 percent surcharge is prima facie presumed correct and made in good faith, the CTA held that it is enough to state that the presumption of correctness of tax assessment does not negate the burden on the CIR to prove, by clear and convincing evidence, the fraudulent intent required for the imposition of the 50 percent surcharge on the ground of willful neglect to file return.
According to the CTA en banc, it is well settled that in order to stand the test of judicial scrutiny, the assessment must be based on actual facts. The presumption of correctness of assessment, being a mere presumption, cannot be made to rest on another presumption.
The Supreme Court supported the same belief and emphasized in Commissioner of Internal Revenue vs Japan Air Lines (JAL), Inc. (G.R. No. 60714 dated Oct. 4, 1991), the importance of proving fraud to justify the imposition of the 50 percent surcharge. Mere citation of the provision of law upon which the surcharge is based without explaining why it is applicable is insufficient to prove fraud.
The willful neglect to file the required tax return or the fraudulent intent to evade the payment of taxes, considering that the same is accompanied by legal consequences, cannot be presumed. This was not proven to be so in the case of JAL as it believed in good faith that it need not file the tax return for it had no taxable income then. The element of fraud, therefore, was lacking.
The fraud contemplated by law is actual and constructive. It must be deliberate fraud, consisting of deception willfully and consciously done or resorted to in order to induce another to give up some legal right. In other words, the fraud committed is intentional. Consequently, in civil tax fraud cases, the burden is always on the CIR to prove that the taxpayer committed fraud intentionally, for the simple reason that the defendant cannot be compelled to testify against himself.
The remaining question then is, how can the CIR prove a fraudulent act by a taxpayer and properly impose the 50 percent surcharge?
In the case of Jose V. Herrera and Ester Ochangco-Herrera vs Commissioner of Internal Revenue (CTA Case No. 2060 dated June 27, 1972), the taxpayer was well aware of his duty under the law based on his declaration of gross receipts from December 1964 to February 1965. From March to December 1965, when said taxpayer failed to file the monthly return of gross receipts and pay the taxes on time, the defense of good faith became untenable.
Further, the court in the same case mentioned two instances when the 50 percent surcharge may be imposed, namely: (1) In case of willful neglect to file the return prescribed therein; or (2) in case a false or fraudulent return is willfully made. The first case involves willful neglect or omission of a duty, while the second involves an overt act of fraud. Based on the mere facts of the case, the court, therefore, ruled that the taxpayer willfully neglected to file his tax return from March to December 1965, and was consequently imposed a 50 percent surcharge.
At this juncture, it is clear that assessments should not be based on mere presumptions, no matter how reasonable or logical said presumptions may be. Hence, the CIR should fully utilize the powers granted by law in obtaining the best evidence or other information to sufficiently support the assessment issued against the taxpayer. The CIR should always be reminded of the broad powers granted by law to be exercised for the determination of the proper amount of taxes to be imposed.
The power of taxation is sometimes referred to as the power to destroy. Therefore, it should be exercised fairly, equally and uniformly with caution to minimize grievance on the part of the taxpayers. Thus, the imposition of a 50 percent surcharge should not be arbitrarily assessed by the BIR.
The author is an assistant manager 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.