Handling Tax Controversy In Philippines
2013 Edition
Handling Tax Controversy In Asia – Philippines
Table Of Contents Philippines ............................................................................................ 3 Introduction .................................................................................... 3 1. Practical Aspects Of Tax Litigation .................................. 4 2. Pros & Cons Of Tax Litigation ......................................... 4 3. Constitutional Issues ......................................................... 5 Tax Audits...................................................................................... 6 1. Selection Of Tax Audit Targets ........................................ 6 (a) Mandatory Cases ........................................................ 6 (b) Top Priority Taxpayers ............................................... 7 (c) Other Priority Taxpayers ............................................ 8 (d) Revenue District Officer’s Discretion ........................ 9 2. Advance Preparation For Tax Audits ............................... 9 3. Procedures During A Tax Audit ..................................... 10 (a) Commencement Of Audit ........................................ 10 (b) Records To Be Inspected .......................................... 11 (c) Informal Conference................................................. 12 (d) Preliminary Assessment Notice................................ 13 (e) Formal Letter Of Demand And Assessment Notice ....................................................................... 14 4. Limitations Period For Assessment ................................ 15 5. Information Gathering Powers ........................................ 17 (a) General Powers To Demand Information................. 17 (b) Search Warrants ....................................................... 17 (c) Limits On Powers ..................................................... 18 (d) Record Keeping Obligations .................................... 18 (e) Legal Privilege ......................................................... 18 6. Possibility Of Resolving Controversies Through Settlement ....................................................................... 19 7. Strategies For Dealing With Tax Audits ......................... 21 Tax Disputes & Litigation ........................................................... 22 1. Dispute/Litigation Procedures ........................................ 22 (a) At The Administrative Level .................................... 22 (b) Jurisdiction Of The Court Of Tax Appeals .............. 23 Baker & McKenzie
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(c) Commencement Of Appeal To The CTA ................ 25 (d) Procedure In The CTA ............................................. 26 2. Alternative Dispute Resolution ....................................... 29 Miscellaneous .............................................................................. 29 1. Payment Of Tax .............................................................. 29 2. Penalties & Interest ......................................................... 30 (a) Penalties ................................................................... 30 (b) Interest ...................................................................... 30 (c) Compromise Penalty ................................................ 30 3. Remedies Of The Government For The Collection Of Delinquent Taxes ............................................................ 31 4. Remedy Of Injunction To Restrain Collection Of Taxes ............................................................................... 32
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Philippines Introduction Tax litigation in the Philippines may be regarded as the taxpayer’s last recourse in battling out baseless tax assessments and avoiding the payment of alleged deficiency taxes. Bringing a case to the Court of Tax Appeals (CTA) is usually resorted to by taxpayers when efforts to contest or settle a tax assessment at the administrative level or within the Bureau of Internal Revenue (BIR) have proven fruitless. Resort to tax litigation becomes significantly more important considering that government’s fiscal targets are rising, and tax examiners and revenue district offices have exhibited an aversion to decide on settlement offers based on the merits of the case. Under Philippine laws, a final tax assessment issued by the BIR must be appealed against (to the BIR) within a certain time period; otherwise, the assessment will become final. Moreover, in case of an unfavorable decision or inaction by the BIR on an appeal against an assessment, the taxpayer must pursue a further appeal to the CTA also within the statutory prescriptive period; otherwise the tax assessment shall likewise be final. In the event the taxpayer fails to contest the tax assessment with the BIR or to appeal an adverse decision or inaction of the BIR to the CTA, the BIR may proceed to enforce collection of the assessed taxes, through administrative and/or judicial remedies, and the taxpayer would have lost the ability to attack the assessment (no matter how baseless and whimsical it may be). This chapter explains the relevant laws, rules and regulations that relate to tax controversies in the Philippines – from tax audits, to administrative tax assessments and finally to judicial appeals – and also provides some insights of steps to be taken when a taxpayer is confronted with a tax controversy.
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1. Practical Aspects Of Tax Litigation
A taxpayer’s propensity to litigate a tax controversy arises more out of necessity than practicality. The taxpayer’s failure to appeal to the CTA an unfavorable decision or inaction of the BIR will render the assessment final, and would enable the BIR to take administrative remedies to enforce collection, such as the issuance of warrants of distraint and levy on the personal and real properties of the taxpayer, as well as the garnishment of the taxpayer’s bank accounts. Failing to litigate or to settle could therefore be financially disastrous for the taxpayer. A difficulty often encountered in tax litigation, however, is the lack of documentary evidence as well as of personnel who are knowledgeable of the accounting practices and transactions subject of the controversy. Because the administrative and judicial proceedings can drag on, taxpayers find themselves in a situation where personnel who knew of the relevant transactions are no longer available to shed light or to testify. 2. Pros & Cons Of Tax Litigation
The significant advantage of tax litigation is that it allows the taxpayer to obtain an independent review of his tax case from an impartial court of justice. The revenue examiners are burdened with steep revenue collection targets, which they need to collect in a given fiscal year, and are faced with the threat of dismissal from service in case of underperformance. This is under a law (commonly referred to as the Attrition Law) which seeks to enhance collections of the BIR and, at the same time, to punish the underachieving examiners. More often than not, examiners tend to issue incredibly huge assessments which have no factual or legal basis, mistakenly hoping that taxpayers will immediately settle. While the rules prescribe a procedure within the BIR for appealing against tax assessments, it seems unlikely and rare that the BIR will allow the appeal, reverse its examiners and cancel the assessments. 4
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Thus, the general perception is that an impartial review of the tax assessment cannot be had administratively, and hence, the need for an objective review of tax cases by the courts. On the other hand, the disadvantages that can be noted are (i) the time and expense involved in tax litigation and (ii) in the event the taxpayer loses the case, interest (20% per annum) on the unpaid tax is imposed, computed from the time the tax assessments were originally due until the taxpayer fully pays the tax. 3. Constitutional Issues
Due Process Of Law Sec. 1 Art. III of the Philippine Constitution provides in part that “(n)o person shall be deprived of life, liberty, or property without due process of law.” The due process clause of the Constitution has 2 aspects – substantive and procedural. Relevant to tax audit and litigation is procedural due process, which states that a taxpayer can be made to pay taxes (and thereby deprived of his property), provided that the remedies and procedures set forth under the law are duly observed, and, hence, the taxpayer is accorded due process. The law provides procedures for making and issuing assessments (discussed in detail below). These procedures must be strictly observed by the government in making an assessment. Failure to observe such procedure may amount to deprivation of the taxpayer’s right to due process. In such a case, the taxpayer may seek redress from the courts and have the tax assessment declared null and void.
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Tax Audits 1. Selection Of Tax Audit Targets
Tax audits in the Philippines are based on selection criteria that are set our yearly by the Commissioner of Internal Revenue in an annual audit program. Taxpayers who are targets of audit are classified into 4 categories: (i) mandatory cases; (ii) top priority taxpayers; (iii) other priority taxpayers; and (iv) revenue district officer’s discretion. For instance, under the 2009 Audit Program, [Note: This is still the latest audit program of the BIR.], the taxpayers/cases under each of the foregoing 4 categories are: (a) Mandatory Cases
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taxpayers with claims for and income tax refund or issue of a tax credit certificate or income tax returns showing carry-over of excess withholding tax/income tax payments, where the amount of claim or carry-over exceeds P100,000 and/or where the gross sales/receipts exceed P10m (P5m in certain cases), which will require the audit/investigation of all internal revenue tax liabilities for the covered period
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taxpayers with claims for a value-added tax (VAT) refund or issue of a tax credit certificate or VAT returns showing excess input tax at the end of the taxable period where the amount exceeds P100,000, which will require the specific audit/investigation of the VAT liabilities only for the covered period
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estate tax returns with other tax liabilities where the gross sales/receipts from business or the gross estate exceeds P10m (P5m in certain cases)
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estate tax returns with no other tax liabilities where the gross estate exceeds P10m (P5m in certain cases)
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request for tax clearance of taxpayers due to retirement/cessation of business with gross assets or gross sales/receipts exceeding P10m, which will require the audit/verification of all internal revenue tax liabilities for the immediately preceding year and the year of retirement of the taxpayer pursuant to Section 52 (C) of the Tax Code of 1997
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request for tax clearance of taxpayers undergoing merger/consolidation/split-up/spin-off and other types of corporate reorganizations with gross assets or gross sales/receipts exceeding P10m, which will require the audit/verification of all internal revenue tax liabilities for the immediately preceding year and the year of corporate reorganization of the taxpayer, specifically, those who will cease to exist
(b) Top Priority Taxpayers
These include the following taxpayers whose gross sales/receipts exceed P5m (P3m in certain cases): •
review centres
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corporations accredited by TESDA
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health providers
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hospitals
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nursing schools
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call centres
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restaurants, food chains and catering services
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construction companies
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taxpayers engaged in the leasing industry (for example, lessors of residential houses/apartments/condominiums and commercial spaces, parking lots, boarding houses, pension houses)
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non-stock non-profit corporations/organizations and foundations
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cooperatives
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lending investors – Under Philippine law, lending investors are “persons other than banks, non-bank financial intermediaries, finance companies and other financial intermediaries not performing quasi-banking functions who make a practice of lending money for themselves or others at interest.”
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pawnshops
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real estate dealers/developers
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hotels and other tourism-related establishments, including resort operators
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retail/wholesale trade
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dealers of agricultural products and supplies
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logistics providers (e.g., arrastre, stevedoring, freight, trucking and courier services)
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contractors of government agencies, instrumentalities, local government units and government corporations
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taxpayers who failed to submit the required Summary List of Sales and Purchases for at least one (1) quarter
(c) Other Priority Taxpayers
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taxpayers who are reporting/filing “No Operations” in their annual income tax returns where, after conduct of an rudimentary
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inspection, it is determined that a business exists and the volume of business transactions warrants audit •
taxpayers with income tax due of less than 2% of gross sales/receipts or total VAT due of less than 3% of gross sales/revenues
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taxpayers reporting a net loss or no taxable income in their tax returns
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taxpayers who are included in the nationwide list of top 20,000 private corporations under the jurisdiction of the respective Revenue District Offices
(d) Revenue District Officer’s Discretion
The Revenue District Officer may select taxpayers which do not fall within the guidelines established above for audit, but the total number of selected audit candidates may not exceed 25% of the total number of taxpayers to be audited by the district office (other than mandatory cases). 2. Advance Preparation For Tax Audits
The best way to manage and prepare for tax audits is still preventive planning, rather than remedial action. This can be done by putting in place policies, practices and procedures which are aimed at strict compliance with the tax laws and regulations. A taxpayer should have a sound accounting system and compliance procedures in place with regard to recording and booking transactions, producing financial reports and other relevant documents, computing the taxes payable, preparing tax returns and other tax filings. If possible, the taxpayer should have a compliance officer who will handle the tax compliance matters of the business. The tax compliance officer should be aware of the current tax laws. Baker & McKenzie
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3. Procedures During A Tax Audit (a) Commencement Of Audit
The tax audit and assessment process begins with the issue by the BIR of a Letter of Authority (LOA). A LOA authorizes a revenue examiner of the BIR to conduct an audit/investigation and examine the books of accounts and accounting records of a taxpayer for the possible assessment of deficiency taxes and penalties. All tax audits/investigations of taxpayers must necessarily be covered by an LOA issued by either the Commissioner of the BIR or his regional directors. Otherwise, the audit/investigation is void. A revenue examiner acting under a LOA must conduct the audit and submit an investigation report within 120 days from the date of the issuance of the LOA. If the final report is not completed within the 120-day period, the revenue examiner must return the LOA for revalidation. Only one revalidation may be made, and this is done by issuing a new LOA. Pursuant to the LOA, the revenue examiner will first request the taxpayer, in writing, to make available for inspection the relevant books of accounts, accounting records and particular documents, and will indicate the time and date when the records should be made available. If at the appointed time the documents are not presented, the revenue examiner should seek an explanation and again make a written request. If, for the second time, the taxpayer fails to present the required records, the revenue examiner must request an explanation in writing, signed by the taxpayer, as to why the records are still unavailable. Thereafter, the revenue examiner, in consultation with supervisors, should submit a written report, pinpointing the records not made available, the taxpayer’s officers who are liable, and the cause of the unreasonable and/or unnecessary delay in the investigation. Finally, the Division Chief or the Revenue District Officer will forward the case to the Chief of the Prosecution Division or the legal branch for the issuance of a subpoena to order the production of the documents, or the filing of the case in court. 10
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(b) Records To Be Inspected
In tax audits or investigations, the revenue examiners generally examine the documents submitted by the taxpayer such as the returns and other tax filings, the audited financial statements (AFS), the trial balance, and other documents/schedules/reconciliations they deem necessary and request in the course of the examination. The revenue examiners typically verify whether the amount of taxable items in the tax returns and the rate used in computing the tax are correct in the circumstances. Moreover, they check whether the amounts of expenses reported in the AFS are reflected in or substantiated, i.e., the income payments/expenses claimed as expenses in the AFS were duly subjected to proper withholding tax as per withholding tax returns. In addition, the revenue examiners usually determine whether a taxpayer’s claimed deductions in the returns are appropriate and allowable under the law. The following are the documents requested of taxpayers during tax audits: •
previously issued letters of authority / tax verification notices and deficiency tax payments, if any
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income tax return with all the required attachments including audited financial statements for the taxable year under audit
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previous year’s income tax return with all the required attachments including audited financial statements
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quarterly income tax returns including attachments with bank official receipts, if with payment
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monthly and annual information returns on withholding taxes, i.e., expanded, compensation and final, including alpha listing and bank official receipt
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monthly and quarterly value added tax returns, including summary list of sales and purchases with bank official receipts
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proof of payment of documentary stamp tax on subscribed capital stock
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working papers showing monthly totals of nominal and real accounts
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trial balance
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copies of lease contract/agreement
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latest copy of general information sheet submitted to Securities and Exchange Commission
The following records should be ready for examination at the taxpayer’s office: •
general ledger
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sales and purchase book
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subsidiary sales and purchase book
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sales invoices and other receipts
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checks and journal vouchers
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other related records
(c) Informal Conference
If after the audit/investigation the revenue examiner determines that the taxpayer is liable for any tax, he must make a written report of his findings and notify the taxpayer. If the taxpayer does not agree, in whole or in part, with the findings, the revenue examiner must notify and invite the taxpayer (through its representatives) to an informal 12
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conference in order to give the latter the opportunity to present its side of the case. If the taxpayer fails to respond to the notice of informal conference within 15 days, it is considered in default, and the case is then sent to the Assessment Division of the BIR for appropriate review and the issuance of a deficiency tax assessment. (d) Preliminary Assessment Notice
If, after the review and evaluation of the case, the Assessment Division determines that there exists sufficient basis to assess the taxpayer for any deficiency tax, a preliminary assessment notice (PAN) will be issued. The PAN must state in detail the facts, law, rules and regulations upon which the assessment is based. The issuance of a PAN is not necessary, and the BIR may proceed with the issuance of a final assessment notice under the following circumstances: •
when the finding of any deficiency tax is a result of a mathematical error in the computation of the tax appearing on the face of the tax return filed by the taxpayer
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when a discrepancy has been found to exist between the tax withheld and the amount actually remitted by the withholding agent
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when a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period is found to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year
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when the excise tax due on excisable articles has not been paid
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when an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment,
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machineries and spare parts, has been sold, traded or transferred to non-exempt persons (e) Formal Letter Of Demand And Assessment Notice
If the taxpayer fails to respond within 15 days from date of receipt of the PAN, it will be considered to be in default, and a formal letter of demand and Final Assessment Notice (FAN) will be issued. A FAN is a written notice and demand made by the BIR on the taxpayer for the settlement of a tax liability that has been definitely determined. It must state the facts, law, rules and regulations on which the assessment is based; otherwise, it is void. The BIR must issue the FAN within the limitations period provided in the Tax Code within which the BIR may make an assessment. If the FAN is issued beyond the limitation period, the assessment is void, unless a waiver has been validly executed by the parties prior to the end of the limitations period. In computing the limitations period, a tax assessment is deemed to be made when the FAN is released, mailed or sent by the BIR. There is no requirement that the notice be actually received by the taxpayer within the limitations. However, if the taxpayer denies having received the FAN from the BIR, it is incumbent upon the BIR to prove by competent evidence that such notice was indeed received by the addressee. The presumption that a mailed letter is received by the addressee in the ordinary course of mail is merely a rebuttable presumption that may be overturned by evidence to the contrary. The moment the taxpayer denied having received the assessment notice, the burden is shifted to the BIR to prove receipt of the notice by the former. The taxpayer may administratively appeal against the FAN within 30 days from the date of receipt by filing a request for reconsideration or reinvestigation. This is referred to as a protest procedure. The taxpayer must state the facts, the applicable law, rules and regulations upon 14
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which the protest is based; otherwise, the protest will be void and without force and effect. The taxpayer must submit the required documents in support of its protest within 60 days from date of filing of the protest; otherwise, the assessment will become final. 4. Limitations Period For Assessment
The period within which the BIR may conduct tax audits follows the limitations period provided under the Tax Code. The BIR has 3 years, from the date prescribed by law for filing of the return or the date of actual filing of the return, whichever is later, within which to issue an assessment. Beyond the 3-years period, the BIR may no longer conduct an audit and issue an assessment. However, in case of false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed within 10 years from the discovery of the falsity, fraud or omission. The limitations period is suspended in the following cases: •
If the Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court, and for 60 days thereafter
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If the taxpayer requested a reinvestigation which was granted by the Commissioner
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If the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected
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If the warrant of distraint is duly served upon the taxpayer, and no property could be located
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If the Commissioner and the taxpayer agree in writing to waive the limitations period.
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A waiver of the limitations period suspends the running of the limitations period, and is a waiver by the taxpayer of a right granted to him by law. Hence, for a waiver to be valid, the waiver must strictly comply with the requirements provided in the pertinent tax regulations. Otherwise, the waiver will not be effective. It bears noting that quite a number of tax cases have been won by taxpayers based on findings that waivers were defective. The requirements for a valid waiver are: •
the waiver must be in the prescribed form; no deviation is permitted
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it must contain the expiry date of the period agreed upon to assess/collect the tax after the regular three-year limitations period
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it must be signed by the taxpayer himself or his duly authorized representative; In the case of a corporation, the waiver must be signed by one of its responsible officials
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after the waiver is signed by the taxpayer, the Commissioner of Internal Revenue or a revenue official authorized by him must sign the waiver indicating that the Bureau has accepted and agreed to the waiver. The date of such acceptance by the Bureau should be shown.
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both the date of execution by the taxpayer and date of acceptance by the BIR should be prior to the expiration of the limitations period (or before the lapse of the period previously agreed upon in case a subsequent agreement is executed)
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the waiver must be executed in 3 copies, the original copy to be attached to the docket of the case, the second copy for the taxpayer and the third copy for the officer accepting the waiver. The taxpayer’s receipt of his/her file copy must be indicated in the original copy.
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5. Information Gathering Powers (a) General Powers To Demand Information
Under the Tax Code, the Commissioner of the BIR, or his representative (in ascertaining the correctness of any return filed by the taxpayer or in determining his liability for any tax) has the power to examine any book, paper, record or other data of a taxpayer relevant or material to the inquiry, and to summon him, or any of his officer or employee who has custody of the books of accounts and other accounting in order to produce the same at the time and place specified in the summons. The summons is referred to as subpoena duces tecum Failure to obey summons, or to appear and produce books of accounts and other required information, is punishable by a fine of not less than PhP5,000.00 but not more than P10,000.00 and imprisonment of not less than 1 year but not more than 2 years. (b) Search Warrants
As a rule, search warrants may be issued only by a court judge (upon application therefore by one party) after it is established that there is reasonable evidence that an offense has been committed, and that the objects sought in connection with the offense are in the place sought to be searched. Since non-payment and evasion of taxes is a criminal offense, theoretically, the BIR may apply for a search warrant provided it is able to establish to the satisfaction of a court judge by reasonable evidence that tax evasion has been committed and the objects, i.e., books of accounts, and other accounting records, sought in connection with it are in the place to be searched. Note that issuance of a search warrant presupposes that an offense has been committed, in contrast to a subpoena duces tecum, which the BIR may issue even when it is merely auditing and examining the taxpayer, and without any finding yet of commission of an offense. Baker & McKenzie
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Note further that issuance of search warrants is not resorted to by the BIR in obtaining books of accounts and other information from the taxpayer. It appears that obtaining taxpayer information through issuance of subpoena duces tecum is sufficient for the BIR to exercise its power to gather information. (c) Limits On Powers
The limitation on the power of the BIR to examine any book, paper, record or other data, or to summon the taxpayer or any other person to produce them, is that said book, paper or record sought to be examined should be relevant or material to BIR’s inquiry or investigation (i.e., ascertaining whether tax returns are filed and proper taxes are paid). (d) Record Keeping Obligations
Under the Tax Code, taxpayers must keep books of accounts and other accounting records during the 3-year period within which the BIR may make an assessment. Failure to keep books of accounts and other accounting records is punishable by a fine of not less than PhP50,000.00 but not more than PhP100,000.00 and imprisonment of not less than two years but not more than four years. (e) Legal Privilege
Under the Rules of Court, a tax advisor who is a lawyer cannot be examined in court as to any communication made by client to him, or his advice given thereon in the course of, professional capacity. This is known as the attorney-client privilege. Attorney-client privilege exists when legal advice is sought from an attorney in his professional capacity with respect to communications made in confidence by the client to him, such that said communications are permanently protected from disclosure, except when waived by the client.
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There is no such similar privilege under the Rules of Court with respect to communications made by client to his accountant or auditor. 6. Possibility Of Resolving Controversies Through Settlement
As a rule, as the stage of the audit/assessment proceeding progresses – from tax audit, to informal conference, to issuance of final assessment – the more difficult it becomes to arrive at a mutually agreed settlement and cancellation of the assessment. The reason is that, as the proceedings advance from one stage to the next, the BIR’s internal review process becomes stricter and more BIR people become involved. For instance, during tax audits, the taxpayer will only have to deal with the revenue examiners. After preliminary or final assessments are issued, the officers at the assessment division, the revenue district officer and the regional director would have been involved. Thus, it is better to negotiate a settlement with the BIR during the early stages of the audit. Settlement simply means that the taxpayer will concede certain findings of the revenue examiners or that the parties will agree on the correct amount of an income or expense item that is at issue, and any deficiency tax will be paid. Normally, these involve items where the taxpayer actually erred and there is indeed a liability for taxes. In exchange for paying these items, the revenue examiner on the other hand will agree to cancel other findings. In a simple sense, settlement involves give and take. A taxpayer may also agree to pay deficiency tax on certain items, usually of nominal amounts, even if such items are fully defensible. The reason may be that the administrative cost of preparing documentary support for these items may not justify pursuing the amount of deficiency tax. Taxpayers likewise consider the expenses likely to be incurred, i.e., fees to legal advisors, in the event the case drags on.
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As stated above, as the proceedings move from one stage to another, the more difficult it is will become to settle the assessment with the BIR. Tax assessments can still be settled after they are issued, but settlement at this level will likely require the approval of the revenue district officer and head of the assessment division. The assessment may also be settled through compromise and abatement (discussed below). Once the matter has progressed to judicial appeal before the CTA, it may still be settled by the taxpayer either through (i) compromise and (ii) abatement of penalties. A compromise allows the taxpayer to pay less than the total amount of tax assessed. The taxpayer must apply to the BIR on the ground that: (i) there is reasonable doubt as to the validity of the claim against the taxpayer; or (ii) the financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. For cases of financial incapacity, the minimum compromise rate is 10% of the assessed tax; for other cases, a minimum compromise rate is 40% of the assessed tax. Where the tax involved exceeds P1m or where the settlement offered is less than the prescribed minimum rate, the compromise is subject to the approval of the Evaluation Board which is composed of the Commissioner and the 4 Deputy Commissioners. On other hand, abatement of penalties (as the name implies) means the cancellation of penalties imposed on top of the assessed tax. The penalties consist of the 25% surcharge, 20% interest per annum and the compromise penalty. A taxpayer applying for abatement must still pay 100% of basic assessed tax. Grounds for application for abatement are: (i) the tax or any portion thereof appears to be justly or excessively assessed; or (ii) the administration and collection costs involved do not justify the collection of the amount due.
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Moreover, there has to be an administrative issuance which allows the application for abatement of penalties. As of date, there is no existing BIR issuance which allows abatement. All other earlier abatement issuances have expired. 7. Strategies For Dealing With Tax Audits
Please see discussion under the heading Tax Audits In addition thereto, the following are recommended: •
the taxpayer should establish good rapport with the revenue examiners. He should treat them with utmost respect and courtesy. In this way, the revenue examiners can be expected to act more objectively and without prejudice
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the taxpayer should attend to the audit well prepared. He must be able to answer the questions of revenue examiners with proficient knowledge of his business and its practices and procedures, and with a good understanding of pertinent tax laws and regulations. If possible, he should be assisted by a tax advisor. In this way, the possibility of absurd assessment is slim because the taxpayer can immediately object to clearly erroneous assessments
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the taxpayer should limit the submission of documents/records to those requested by revenue examiners. Less information in the hands of revenue examiners will mean fewer bases for possible tax assessments. However, if additional documents need to be submitted in order to clarify issues and to support a position, i.e., reconciliations and summaries, the taxpayer should volunteer them to the examiners.
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Tax Disputes & Litigation 1. Dispute/Litigation Procedures (a) At The Administrative Level
As discussed under the heading Tax Audits, the taxpayer has the opportunity to contest the findings of tax assessments of the BIR examiners at every stage of the tax audit and administrative assessment process – from informal conference (3[c]), to the issuance of PAN (3[d]), and to the issuance of FAN (3[d]). To summarize, if after a tax audit/investigation, the revenue examiner determines that the taxpayer is liable for any tax, he will invite the taxpayer (through its representatives) to an informal conference in order to allow the taxpayer an opportunity to present its case. If the taxpayer is able to sufficiently establish that the findings of assessment are indeed without basis, the same may (subject to review of higher authorities) be cancelled and the audit terminated. However, if the taxpayer fails to respond to the notice of informal conference within 15 days, it is considered in default, and the case is then sent to the Assessment Division of the BIR for appropriate review and issuance of a deficiency tax assessment. If, after the review and evaluation of the case, the Assessment Division determines that there exists sufficient basis to assess the taxpayer for any deficiency tax, a preliminary assessment notice (PAN) will be issued. At this stage, the taxpayer is likewise given the opportunity to dispute the assessments contained in the PAN within 15 days from the receipt thereof. For this purpose, the taxpayer must state in its position paper the facts and the law upon which its position is based. If the taxpayer is able to sufficiently establish that the assessments contained in the PAN are without basis, the BIR may agree to cancel them. However, if the taxpayer fails to respond within 15 days from date of receipt of the PAN, it will be considered to be in default, and a formal letter of demand and Final Assessment Notice (FAN) will be issued. The taxpayer is likewise given the opportunity to dispute the 22
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assessments contained in the FAN by submitting protest-letter within 30 days from the receipt thereof. The protest-letter must contain the facts and law upon which the protest is grounded. Also, if the taxpayer is able to sufficiently establish that the assessments contained in the FAN are indeed without basis, the BIR may agree to cancel them. As mentioned, the taxpayer’s failure to respond to the FAN within 30 days from receipt will render the assessment final and executory. (b) Jurisdiction Of The Court Of Tax Appeals
The CTA exercise the following powers: •
Exclusive jurisdiction to hear appeals against the following: o
decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue or other laws administered by the Bureau of Internal Revenue
o
inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relations thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific period of action, in which case the inaction shall be deemed a denial
o
decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally decided or resolved by them in the exercise of their original or appellate jurisdiction
o
decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other money charges, seizure, detention or release of property affected, fines,
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forfeitures or other penalties in relation thereto, or other matters arising under the Customs Law or other laws administered by the Bureau of Customs o
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jurisdiction over cases involving criminal offenses: o
•
decisions of the Central Board of Assessment Appeals in the exercise of its appellate jurisdiction over cases involving the assessment and taxation of real property originally decided by the provincial or city board of assessment appeals
exclusive original jurisdiction over all criminal offenses arising from violations of the National Internal Revenue Code. Offences or felonies where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is less than P1m or where there is no specified amount claimed are tried by the regular Courts and the jurisdiction of the CTA in this case is to hear appeals. Any provision of law or the Rules of Court to the contrary notwithstanding, the criminal action and the corresponding civil action for the recovery of civil liability for taxes and penalties must be simultaneously instituted with, and jointly determined, in the same proceeding by the CTA, the filing of the criminal action being deemed to necessarily carry with it the filing of the civil action, and no right to reserve the filing of such civil action separately from the criminal action is recognized
exclusive appellate jurisdiction in criminal offences: i.
over appeals from judgments, resolutions or orders of the Regional Trial Courts in tax cases originally decided by them, in their territorial jurisdiction.
ii. over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts in the exercise of their appellate jurisdiction over tax cases originally decided by the
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Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts in their respective jurisdiction. •
jurisdiction over tax collection cases o
•
exclusive original jurisdiction in tax collection cases involving final assessments for taxes, fees, charges and penalties (but collection cases where the principal amount of taxes and fees, exclusive of charges and penalties claimed is less than P1m are tried by the Municipal Trial Court, Metropolitan Trial Court and Regional Trial Court)
exclusive appellate jurisdiction in tax collection cases: i.
over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax collection cases originally decided by them, in their respective territorial jurisdiction
ii. over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts in the Exercise of their appellate jurisdiction over tax collection cases originally decided by the Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts, in their respective jurisdiction (c) Commencement Of Appeal To The CTA
If the protest is denied, in whole or in part, by the Commissioner of the BIR or his duly authorized representative, the taxpayer may lodge an appeal by filing a petition for review with the CTA (at division level) within 30 days from date of receipt of the said decision; otherwise, the assessment will become final. While the decision of the Commissioner is usually expressed in the form of a letter to the taxpayer, a civil suit for collection can also be considered as a denial of the protest of the assessment. If the Commissioner, without categorically deciding the request for Baker & McKenzie
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reconsideration or reinvestigation, proceeds with distraint and levy or institutes an action in the ordinary courts, such action is deemed to be implicit denial of the taxpayer’s protest, and the taxpayer’s remedy is to appeal to the CTA. In case the decision of denial of the BIR is deemed made through the issuance of a warrant of distraint or levy or civil suit for collection, the taxpayer, upon filing a petition for review with the CTA, may ask the court to issue an injunction or order to prevent the BIR from proceeding with its collection action. As a rule, an injunction is not available to restrain the collection of internal revenue taxes but, as an exception, the CTA may issue injunctions against administrative collection, i.e. by distraint and levy, when collection could “jeopardize” the interest of the Government or the taxpayer. The court may require the taxpayer to post a bond. Ordinary courts may not issue such an injunction. If, on the other hand, the Commissioner of the BIR or his duly authorized representative fail to act on the taxpayer’s protest within 180 days from date of submission of the supporting documents for the protest, the taxpayer may likewise appeal to the CTA Division within 30 days from the lapse of the said 180-day period. (d) Procedure In The CTA
The procedure in the CTA is as follows: •
upon receipt by the CTA of the taxpayer’s petition for review (petition), it will be docketed and assigned a number. Thereafter, the petition will be raffled or assigned to one of three divisions of the CTA
•
the CTA is composed of a Presiding Justice and 8 Associate Justices, divided into 3 divisions. Each division is composed of 3 Justices. The CTA at division level hears and decides the case
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•
once assigned to a particular division, the clerk of court of the division will issue the necessary summons to respondent BIR
•
within 15 days from service of summons, the BIR will have to file an answer to the petition
•
within 10 days after answer, the BIR must shall certify and forward to the CTA all the records of the case in its possession, with the pages duly numbered and, if the records are in separate folders, then the folders must also be numbered
•
thereafter, the CTA will set a date for the pre-trial hearing and order the parties to respectively submit pre-trial briefs
•
after pre-trial, the trial proper ensues. During the trial, each party will present testimonial and documentary evidence to support its case, after which the CTA will require the parties to submit memoranda. The case will then be submitted for resolution
•
New Judicial Affidavit Rule
•
Under the Supreme Court's New Judicial Affidavit Rule ("Rule"), effective 1 January 2013, in actions and proceedings requiring the reception of evidence before first and second-level courts, including appellate courts and quasi-judicial bodies, the parties are required to submit a judicial affidavit of their witnesses, which will take the place of the direct oral testimony of the witnesses. The judicial affidavit, which is in a form of question and answer (with the documentary exhibits required to be attached), is served on the adverse party, and submitted to court at least 5 days before the pre-trial, preliminary conference or the scheduled hearing of the motions or incidents.
•
However, the cross-examination of the witness by the adverse party, as well as his (the witness') re-direct and re-cross examinations, will be conducted orally in open court.
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•
Failure to submit the judicial affidavit and documentary exhibits on time will be deemed a waiver of their submission. However, a party may be allowed to belatedly submit the judicial affidavit once, provided that the delay is for a valid reason, the adverse party would not be unduly prejudiced, and the erring party pays a fine of not less than P1,000.00, but not more than P5,000.00, at the discretion of the court.
•
Even prior to this Rule, the use of judicial affidavit (in lieu of direct oral testimony) has been the practice at the CTA with the requirement only that it is submitted at least 3 working days before the scheduled presentation of the witness (as opposed to "at least 5 days before the pre-trial, preliminary conference or the scheduled hearing of the motions or incidents" under the new Rule).
•
There is a move from among practitioners appearing before the CTA, and even the CTA itself, to request the Supreme Court to exempt the court from the new Rule. The reason is that under its previous judicial affidavit rule, the CTA has been able to speedily dispose of tax cases. In fact, the CTA is considered to be one of the most efficient courts in the country today.
•
if the CTA Division renders a decision denying in whole or in part the taxpayer’s petition for review, thereby affirming (in whole or in part) the BIR’s assessment, the taxpayer may file a motion for reconsideration with the Division within 15 days following the date of receipt of the notice of decision
•
if the CTA Division denies the taxpayer’s motion for reconsideration, the taxpayer may file an appeal via petition for review with the CTA sitting en banc (i.e., all 9 Justices) within 15 days following the date of receipt of notice of denial of the motion for reconsideration
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•
if the CTA en banc renders a decision adverse to the taxpayer, it may file a motion for reconsideration within 15 days from date of receipt of notice of decision
•
the denial by the CTA en banc of the motion for reconsideration may be appealed to the Supreme Court via petition for certiorari within 15 days from receipt of notice of denial
•
if no appeal or motion for reconsideration or new trial is filed within the time provided, the judgment or final resolution becomes final
2. Alternative Dispute Resolution
The Court of Tax Appeals and the Supreme Court, are currently undertaking the drafting of the rules on a court-annexed mediation in the Court of Tax Appeals. The draft rules is entitled, “Guidelines for the Implementation of Mediation in the CTA.” Mediation is a process of settling disputes with the assistance of an acceptable, impartial and neutral third party called a mediator. The mediator helps parties identify issues and develop proposals to resolve their disputes. Once the parties have arrived at a mutually acceptable arrangement, the agreement becomes the basis for the court’s decision on the case. Court-annexed mediation means a mediation process conducted under the auspices of a court, after such court has acquired jurisdiction over the dispute.
Miscellaneous 1. Payment Of Tax
Taxes are paid on or before fixed deadlines, which deadlines vary depending on the type of tax due. The return is filed and the tax paid with the Authorized Agent Bank (AAB) of the Revenue District Office (RDO) having jurisdiction over the place of business of the Baker & McKenzie
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taxpayer. In places where there are no AABs, the return shall be filed and the tax paid with the Revenue Collection Officer or the duly Authorized City or Municipal Treasurer within the Revenue District where the taxpayer’s place of business/office is located. 2. Penalties & Interest (a) Penalties
Under the Tax Code, in addition to the basic taxes, the failure of the taxpayer to file tax returns and pay taxes shall result in a liability to pay surcharge of 25% based on the amount of basic tax. In case of wilful neglect to file a return within the period prescribed, or in case of a false or fraudulent return, a surcharge of 50% of the basic tax is imposed. In case of deficiency tax assessment (where the taxpayer has actually filed a tax return, but amount of tax paid is alleged by the BIR to be deficient), there is also a surcharge of 25% based on the amount of deficiency tax, if the taxpayer fails to pay the same within the time prescribed in the notice of assessment. (b) Interest
Moreover, a deficiency interest of 20% per annum (computed from the date prescribed for payment of the tax until full payment) is likewise imposed on the amount of basic tax, where there is failure to file return and pay the tax on time. (c) Compromise Penalty
Furthermore, for violations of the Tax Code which are subject to criminal penalties (such as belated filing of tax returns), the taxpayer may be required to pay certain amounts as compromise penalties in lieu of criminal prosecution. The amount of compromise penalty payable depends on the violation and is determined based on a schedule of compromise penalties prescribed by the BIR.
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3. Remedies Of The Government For The Collection Of Delinquent Taxes
The Tax Code provides several remedies for the Philippine government to enforce the collection of delinquent taxes from taxpayers in the Philippines. Distraint Of Personal Property, Levy Upon Real Property, And Court Action If the assessment against the taxpayer becomes final, executory and demandable (i.e., in the event that the Company fails to file an administrative protest against a deficiency tax assessment made by the BIR or, if such protest is filed, the protest or a subsequent judicial appeal thereof is denied), the BIR may effect the collection of the taxes, including surcharge and interest: (a) by distraint of personal property, which includes stocks and other securities, debts, credits, bank accounts, and interest in and rights to personal property, (b) by levy upon real property and interest in or rights to real property, and (c) by civil or criminal action. The remedies may be pursued simultaneously until the full amount of tax liability is collected. Tax Lien Moreover, if the taxpayer, after demand, neglects or refuses to pay the tax assessment, the amount thereof shall constitute a lien on all property and rights to property belonging to the taxpayer from the time the assessment is made until fully paid. However, the lien shall not be valid against any mortgagee, purchaser or judgment creditor until notice of such lien is filed with the Register of Deeds of the province or city where the property of the taxpayer is situated. The tax lien will subsist from the time the tax assessment is made until the amount of unpaid tax and the accessory liabilities (surcharge, interest and other penalties) are fully paid.
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4. Remedy Of Injunction To Restrain Collection Of Taxes
As a rule, an injunction is not available to restrain the collection of internal revenue taxes but, as an exception, the CTA may issue injunctions against administrative collection, i.e. by distraint and levy, when collection could “jeopardize” the interest of the Government or the taxpayer. The court may require the taxpayer to post a bond. Ordinary courts may not issue such an injunction.
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CONTACT DETAILS If you wish to receive more information regarding the issues addressed in this Handbook, please feel free to contact the following partner of Baker & McKenzie: Dennis Dimagiba Tel: +63 2 819 4912 Email:
[email protected] Quisumbing Torres 12th Floor, Net One Center 26th Street Corner 3rd Avenue Crescent Park West Bonifacio Global City Taguig, Metro Manila Philippines 1634 Tel: +63 2 819 4700 Fax: +63 2 816 0080
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