Establishing legal and factual bases of tax assessments

Under Section 228 of the Tax Code, a taxpayer must be informed in writing of the legal and factual bases of the tax assessment made against him. Otherwise, the assessment shall be considered void.

In the preliminary assessment notice (PAN) and Formal Assessment Notice (FAN) issued against the taxpayer, the BIR merely stated that per computerized matching conducted by the BIR, the taxpayer has undeclared importations as a result of comparing the Bureau of Customs (BOC) importation data and the VAT returns of the taxpayer.

The Court of Tax Appeals (CTA) held that the assessment notices issued against the taxpayer were not valid since they failed to state the legal and factual bases for the deficiency income tax and VAT arising from the alleged undeclared importation of the taxpayer. 

The CTA noted that the details in the assessment notices issued to the taxpayer are not sufficient to allow the taxpayer to intelligently answer the assessment as well as prepare the documentary evidence for its protest. Hence, it cancelled the deficiency VAT and income tax assessment arising from the alleged undeclared importation of the taxpayer.

(Commissioner of Internal Revenue v. BASF Philippines, Inc., CTA EB Case No. 872 re CTA Case No. 8128, September 12, 2013)

Tax Brief

Punongbayan and Araullo

Thinking about Christmas or taxes

WE ARE NOW in the last month of the year. At this time, companies will be closing their books, managing reconciliations of their accounting records against their tax returns, conducting year-end adjustments, preparing for the year-end withholding tax obligations, completing compliance requirements for renewal with the Bureau of Internal Revenue (BIR) and local government unit (LGU) registrations and planning for the 2014 income tax filing season.

December is also the time of the year when taxpayers evaluate certain tax positions and plan for actions that may impact not only the current taxable year but also the subsequent years.

Revisiting the significant BIR issuances and Revenue Regulations (RR) for the year is therefore a rational thing to do before we say: GOODBYE, 2013!

TRANSFER PRICING GUIDELINES (RR NO. 2-2013)

It can be recalled that, under this regulation, taxpayers are mandated to keep documentation to demonstrate that transfer prices (TP) between related parties are consistent with the arm’s length principle.

TP documentation should be an item in any taxpayer’s policy-making and tax planning assessments.

If there is still no written inter-company agreement, it is advisable to have one accomplished immediately. It is best to be prepared when the BIR requires the submission of the intercompany agreement in a transfer pricing audit.

NEW INVOICES AND ORS (RMO 12-2013)

Considering the several extensions granted by the BIR for the application of authority to print (ATP), it is a grave sin if one was unable to process one’s ATP application. Though the penalty prescribed under Sec. 264 of the Tax Code was only for a fine, which ranges from P1,000 - P50,000, the aggressiveness of the law should not be discounted: non-compliance may be considered a criminal liability for which taxpayers may suffer imprisonment of not less than two years but not more than four years.

Surely, as a supplier, you would not want to be ill-favored by your cautious customers who would likely prefer your compliant competitors.

If you have properly complied with this requirement, your next task is to ensure that you are not receiving outdated official receipts or invoices from your suppliers. This will significantly impact your claim of input taxes and deductibility of expense for income tax purposes.

WITHHOLDING REQUIREMENT FOR DEDUCTIBILITY OF EXPENSES (RR NO. 12-2013)

It can be recalled that, under the new regulations, even if the deficiency withholding tax is paid during the investigation, the expense item to which such deficiency withholding tax relates will not be allowed as a deduction against the taxable income in the year incurred.

Think of the dire consequences that taxpayers will face after the issuance of the regulation, specifically on the assessment on withholding tax and income tax.

Revisit the employee’s liquidation of cash advances and reimbursement of expenses made during the year. Aside from probing if the expenses were duly supported with official receipts under the name of the company, validate if such expenses were subjected to expanded withholding tax. 

If, currently, there are transactions that have not been subjected to withholding tax, evaluate the cost-benefit of amending the withholding tax returns and paying the withholding tax to avoid the assessment on non-withholding and further disallowance of the expense.

RECOVERY OF INPUT TAXES ATTRIBUTABLE TO VAT ZERO-RATED SALES (RMC NO. 57-2013)

By this time, taxpayers should be able to forecast if unutilized input tax attributable to value-added tax (VAT) zero-rated sales would be best reco vered through a claim for refund or tax credit certificate (TCC) or, better yet, carried over to the next taxable year.

The option was made critical because of RMC 57-2013, which prohibits expensing of unutilized input VAT attributable to VAT zero-rated sales. It was held that expensing may only be allowed if a claim for refund or tax credit has been filed and that the same was denied by the BIR for failure to comply with the invoicing requirements.

NEW DAILY MINIMUM WAGE RATES IN THE NATIONAL CAPITAL REGION (RMC NO. 71-2013)

On top of the Christmas bonus, employees have reason to cheer the new minimum wage rate in the NCR, which took effect in November.

As a consequence, employers need to revisit the compensation (basic salary plus other income including bonus) given to employees -- if these will now be within the minimum wage and considered non-taxable. 

Increasing the salary and benefits of the employees (up to the extent of the new minimum wage rate limit) without imposing additional tax is required by the issuance.

TREATMENT OF DEPOSITS AND ADVANCES (RMC NO. 16-2013)

We were surprised by the harsh treatment required on deposits or advances received by taxpayers from their clients/customers. It was mandated that any amount received as advances or deposits shall be booked as income and shall form part of the gross receipts of the taxpayer, subject to VAT or percentage tax. The advances shall, on the other hand, be considered a deductible expense by the client/customer provided that it is duly substantiated with official receipts.

Before this issuance, taxpayers first had to make a qualification if the deposit was refundable or non-refundable to be considered taxable or not. This time, the issuance says that cash deposits or advances are taxable upon receipt without qualification. 

Let’s not lose hope, though, but continue to advocate for the BIR to clarify the type of cash advances or deposits to be covered by the new requirements. This treatment has irreconcilable consequences that will place some taxpayers at a great disadvantage.

TAXABILITY OF HOMEOWNERS’ ASSOCIATIONS (RMC NO. 9-2013)

Homeowner’s associations are now subject to income tax and VAT. As a consequence, income payments to them representing membership fees and association dues are likewise subject to the applicable withholding taxes under existing regulations.

The members will feel the escalating cost of living in the city because these taxes will definitely be passed on to them.

With tax rules becoming more challenging each year and the BIR putting the pressure on taxpayers to be accountable for complete compliance, new tax issuances and regulations should be carefully revisited. 

Surely, we don’t want to be thinking about taxes during the Christmas season.

Jen R. Serrano

Let’s Talk Tax

Punongbayan and Araullo

Cutting corners in the tax assessment process

WITH Manny Pacquiao’s tax evasion case with the Bureau of Internal Revenue (BIR) still a sizzling topic, the tax office issued a new revenue regulation that is making waves among taxpayers, tax practitioners and revenue officers with regard to the due process requirements in issuing deficiency tax assessments.

The rules governing the issuance of deficiency tax assessments are long established under Section 228 of the National Internal Revenue Code of 1997 (Tax Code) and its implementing regulation, RR No. 12-99. Under the old rules, after the examination of a taxpayer’s books of accounts and other records pursuant to a Letter of Authority or a Letter Notice, the BIR officer who performed the audit shall notify the taxpayer of the discrepancy or discrepancies in the latter’s tax payments, by issuing a Notice of Informal Conference. The taxpayer is then given 15 days to present his side of the case.

In case the taxpayer fails to timely respond to the Notice of Informal Conference, the revenue officer may endorse his findings for the issuance of a Preliminary Assessment Notice (PAN) or a Formal Letter of Demand (FLD)/Final Assessment Notice (FAN), whenever the case falls under the situations enumerated in the Tax Code when a PAN is no longer required. Again, once a PAN is issued, the taxpayer has 15 days to refute the findings of the revenue officer.

If the issues are not resolved at the PAN stage, the BIR may issue the FLD/FAN calling for the payment of the deficiency taxes. The taxpayer is given 30 days from receipt of the FLD/FAN to submit a written protest against the assessments, and 60 days from the filing of the written protest to submit all relevant supporting documents. The taxpayer’s failure to protest the FLD/FAN or submit all relevant supporting documents within the prescribed period makes the tax assessments final, executory and demandable.

If the Commissioner of Internal Revenue or his duly authorized representative denies the protest, or fails to act on the protest, the taxpayer may elevate the decision of the Commissioner to the Court of Tax Appeals (CTA) within 30 days from receipt of the denial or lapse of the 180-day period for the Commissioner to decide. The taxpayer’s failure to timely appeal the adverse decision or the inaction of the Commissioner of Internal Revenue to the CTA makes the assessments final, executory and demandable.

Revenue Regulations (RR) No. 18-2013, dated Nov. 28, 2013, changed the pace of the tax assessment and collection process by introducing the following amendments:

1. Omission of the issuance of the Notice of Informal Conference;

2. Issuance of the FLD/FAN within 15 days from receipt of the PAN, in case of default by the taxpayer, or within 15 days from filing of the reply to the PAN, in case of disagreement with the tax findings in the PAN;

3. Requirement on the part of the taxpayer to state the nature of protest to the FLD/FAN, whether for request for reconsideration and request for reinvestigation, and prescribing the legal effects of each mode;

4. Institution of the administrative appeal with the Commissioner of Internal Revenue through request for reconsideration, in which the taxpayer is barred from presenting newly discovered or additional evidence to support his case;

5. Inclusion of an exclusivity rule in case of inaction of the Commissioner on the protested assessment, i.e., the remedy of filing a petition for review with the Court of Tax Appeals bars the remedy of waiting for the final decision of the Commissioner or his duly authorized representative, which decision is subject to appeal to the CTA;

6. Institution of personal service and substituted service as modes of serving the PAN/FLD/FAN and the Final Decision on Disputed Assessment (FDDA) in addition to service by registered mail.

The most notable amendment introduced by RR 18-2013 is the removal of the Notice of Informal Conference. The Notice of Informal Conference is not a requirement under the Tax Code; nevertheless, it was institutionalized under RR 12-99 as part of procedural due process. In scrapping this requirement, the BIR aims to achieve an assessment and collection process which, in numerous cases decided by the courts, is defeated by the defense of prescription under the statute of limitations of the Tax Code.

The BIR seems to be keen on formalizing the tax assessment after the investigation reaches the PAN stage. It is interesting to note that the BIR only has 15 days to resolve the issues in the PAN stage and issue the FLD/FAN. A real evaluation of the documents and arguments of the documents submitted by the taxpayer takes time and needs more than 15 days. Understanding the documents, tax reconciliations and legal defenses is impossible to do within a short period of 15 days primarily because of the huge numbers of tax investigations assigned to revenue officers. The only way to prevent the issuance of the FLD/FAN is to settle the tax assessments in the PAN, which would make one wonder why replying to the PAN is one of a taxpayer’s remedies in the first place.

The shortened period does not give the taxpayers enough time to prepare his documents and arguments. More importantly, it does not allow the BIR officers enough time to consider and study the documents and arguments presented to them.

It would seem that the shortened period, though aimed at expediting the process, however makes the PAN stage inutile.

There are other interesting provisions in RR No. 18-2013 which, in my opinion, should have been the topic of an open forum between the BIR and taxpayers, or now that it is issued, be the subject to a clarificatory issuance by the BIR. This "game changer" will take effect on Dec. 15, 2013, and given its important amendments, it pays to have a proper understanding of procedural due process as part of a taxpayer’s rights and remedies under the law.

Jean Abenasa-Miso

Let’s Talk Tax

Punongbayan and Araullo

Pacquaio's defense

WHEN an assessment has become final and executory, what can the taxpayer do?

A taxpayer is given ample time to protest the tax assessment made by the Bureau of Internal Revenue (BIR) for any taxable year. In fact, a typical assessment -- from issuance of letter of authority to the final assessment notice (FAN) -- lasts at least six months and involves several correspondences between the taxpayer and the tax examiner. However, when the assessments made by the BIR are duly received by the taxpayer, but the taxpayer fails to file its protest within the prescribed period, the said assessment will become final and executory, and will be subject to collection.

Based on news articles, this seems to be where the tax case of boxing legend Manny Pacquiao is.

When the assessment has become final and executory, any taxpayer who finds himself in the same situation as Pacquiao has the option to pay the full amount, which includes the basic tax plus increments, or apply for compromise settlement, or altogether refuse to pay the assessed tax.

The first option -- pay the final assessed tax and increments -- includes the basic tax, interest of 20%, surcharges of 25%-20% and penalties, if any. This may not be a practical option for Pacquiao since he can provide the documents required by the BIR to prove his payments made in the US through Top Rank. Further, any income made in the Philippines will still be subject to deductibles, subject to proper documentations. Therefore, the assessment made by the BIR may be minimized to a few millions, if not a few hundred thousand pesos.

As to the second option, compromise is when the taxpayer and the BIR enter into an agreement by making reciprocal concessions to avoid litigation or to put an end to one that has already commenced. One of the grounds that can be subject to a compromise, under Revenue Regulations No. (RR) 30-02, as amended by RR 08-04 and RR 09-13, is when there is failure to file a request for reinvestigation or reconsideration within 30 days from issuance of FAN, and there is reason to believe that the assessment is lacking in legal and/or factual basis. A compromise offer must be paid by the taxpayer upon filing of application for the compromise settlement.

In Pacquiao’s case, should his tax consultants find that the factual basis of the alleged deficient tax liability can be weakened by evidence showing payment of taxes, such as authenticated or original documents coming from the Internal Revenue Service (IRS), then they can opt to offer a compromise settlement with the BIR. If the BIR accepts the compromise settlement, the amount that Pacquiao is required to pay will be reduced to at least 40% of the basic tax assessed. It must be noted that the full amount can no longer be cancelled, mainly because the assessment has become final and executory without any protest filed by Pacquiao. However, a smaller amount may be allowed, subject to the approval of the National Evaluation Board, which shall be composed of the commissioner of Internal Revenue and the four deputy commissioners of the BIR.

Technical knock-out is Pacquiao’s worst enemy in this match. Prudence teaches us that a taxpayer must be diligent and responsible in his or her tax responsibilities. And any negligence is but the accountability of the taxpayer himself or herself, and not his or her accountants or lawyers -- a principle upheld in the Kintanar case (People v. Gloria Kintanar [CTA EB Crim. No. 006, Dec. 3, 2010] was sustained by the Supreme Court (SC) in 2012).

Some would ask, why put Pacquiao in the hot seat when he acquired all his income through hard work, persistence and legal means? A simple answer is this: he is not a special case. Other taxpayers who failed to file their protest within the prescribed period also earned their income in an honest and diligent manner. If Pacquiao is given special consideration, then this should likewise be extended to other taxpayers in a similar situation.

Pacquiao's tax situation has happened before and will happen again. It just so happens that the issuance of the warrant of garnishment was served after the devastation of typhoon Yolanda, when we lost several kababayans, and after the success of Pacquiao in his fight against Brandon Rios. The timing is unfortunate, but the tax consequences should be expected because the process has been in place for some time now.

Dura lex sed lex. The law may be harsh, but that is the law.

Maridelle N. Ramos

Let’s Talk Tax

Punongbayan and Araullo