A matter of settling tax obligations

"TAXES are what we pay for (a) civilized society, or are the lifeblood of the nation."

There is an old saying that in this life, there are only two matters that remain constant, namely: change and taxes.

This is a delusion, as there should be a third -- issuances from the Bureau of Internal Revenue (BIR).

At the advent of the current administration, the BIR has been constantly introducing new measures or re-introducing measures to improve those already in place in its attempt to improve collection.

One of the more recent measures issued to realize this objective is Revenue Regulations (RR) 9-2013, dated May 10, 2013, which sets a timeline for the payment of the compromise offer in a compromise settlement.

According to the new revenue regulations, taxpayers seeking a compromise settlement of unsettled tax obligations must now pay the compromise offer upfront before their applications are processed.

No application for compromise settlement shall be processed without the full settlement of the offered amount.

The new rules amended RR 30-2002, dated Dec. 16, 2002, which provided the implementing guidelines for Sections 7(c), 204(a) and 290 of the NIRC on the compromise settlement of tax liabilities.

Under the previous revenue regulations, the taxpayer has option to pay the compromise offer either before or upon filing the application or after the approval of the offer of compromise by the board.

In case the compromise is disapproved and the applicant had already paid his offer, the payment would be deducted from the taxpayers’ outstanding liability.

A BIR deputy commissioner already admitted in a newspaper article that this move is a collection strategy.

Indeed, this is a good collection strategy. The BIR can immediately receive the amount offered for compromise and need not wait until the compromise offer is evaluated by the boards and accepted or denied.

But is it fair to the taxpayers?

Under the rules on compromise settlement, the Commissioner of Internal Revenue is given an authority to compromise the payment of internal revenue tax liabilities of certain taxpayers with outstanding receivable accounts and disputed assessments with the BIR and the Courts.

Article 2028 of the Civil Code of the Philippines provides that a "compromise is a contract whereby the parties, by making reciprocal concessions, avoid litigation or put an end to one already commenced."

Compromise therefore implies a mutual agreement between the parties involved, e.g. taxpayer and BIR.

Under the present rules, the power of the commissioner to compromise any national internal revenue tax requires compliance with specific conditions, to wit: (a) there is reasonable doubt as to the validity of the claim against the taxpayer [doubtful validity of the assessment], or (b) the financial position of the taxpayer demonstrates a clear inability to pay the assessed tax [financial incapacity].

These conditions are not all-encompassing as these matters are always subject to other considerations set forth by the BIR.

You may recall that under the prevailing rules, the cases which may be compromised upon the taxpayer’s compliance with the relevant rules and regulations are limited to the following: (1) delinquent accounts; (2) cases under administrative protest after issuance of the final assessment notice to the taxpayer which are still pending in the regional offices, revenue district offices, legal service, Large Taxpayer Service (LTS), collection service, enforcement service and other offices in the national office; (3) civil tax cases being disputed before the courts; (4) collection cases filed in courts; and (5) criminal violations, other than those already filed in court or those involving criminal tax fraud.

In case of delinquent accounts, the BIR may be justified in requiring advanced payment of the compromise offer as th ese are otherwise already collection cases.

However, is the new rule fair in other cases? Take for instance deficiency taxes arising from a jeopardy assessment or assessed without the benefit of complete or partial audit by the revenue officer.

This is resorted to if there is reason to believe that the assessment and collection of a deficiency tax will be jeopardized by delay because of the taxpayer’s failure to comply with the audit and investigation requirements set forth by law.

Consequently, the amounts assessed may be huge and without solid basis. Hence, both BIR and the taxpayer may find it mutually beneficial to agree on a compromise amount.

The taxpayer may opt to enter into a compromise settlement which the BIR has reason to accept because of the doubtful validity of the assessment.

In such cases where the settlement is mutually beneficial, is it fair for the BIR to require advance payment while it has not yet delivered its part in the settlement?

Certainly, this amendment ushers a new development that bridges the gap between compliance and collection which, in reality, is mutually beneficial to both the taxpayer and the BIR.

Nevertheless, the taxpayer must remain cautious and vigilant in entering any compromise agreement.

Once the taxpayer has showed his intention to compromise his tax violations, whether he likes it or not, he begins to feel that he will now be at the mercy of the BIR.

He begins to realize that other considerations can come into play other that the requirements and conditions in the regulations -- which should not be the case.

While compromise settlement is being offered for practical purposes, it must be emphasized that the crux of the latter is the relief extended to both the taxpayer and the BIR.

On the part of the taxpayer, said compromise aims to ease his burden in meeting his obligation to pay taxes; while on the other hand, on the part of the BIR, it serves as an avenue of additional collection or revenue.

This is a very valid program. It has been legislated based on valid reasons. Taxpayers should not be left to lose their hope that this is a remedy that they can turn to in cases of clear financial incapacity and doubtful validity of the assessment.

The BIR must be reminded of the crux of compromise settlement. Any program of the government which can provide a reasonable relief on the taxpayer’s burden should always be earnestly deliberated.

Robert Josef A. de Guzman
Let's Talk Tax
Punongbayan and Araullo