What makes or breaks a tax case

ANYONE who likes mainstream pop music knows that the chorus often makes the song. The chorus is the high point, with the most unforgettable lines and the catchiest beat. A song may or may not have a third or a fourth verse or even a coda. But a chorus is a must.

Having been in the tax practice for several years, I have come to observe that tax cases with the Bureau of Internal Revenue (BIR) often follow the pattern of songs. Like songs with lines and verses, each relating to its message, a tax investigation has several parts, and when taken as a whole, the exercise is aimed at determining whether the taxpayer has unpaid taxes and whether the government has the right to assess and collect the same.

First, an investigation takes place where tax issues are identified and addressed. The taxpayer and the BIR examiners go through the process of discussing the tax treatment of income and expenses, discussing laws and jurisprudence, reconciling tax discrepancies and submitting supporting documents. In every stage of the tax investigation, the substantive and procedural due process rules must come into play: the BIR is required to send a Preliminary Notice Assessment, to which a taxpayer is given 15 days to reply and submit documents; in case of a disagreement as to the taxes assessed, the BIR shall send a Final Letter of Demand (FLD) or a Final Assessment Notice (FAN) within the three (3) -year period prescribed for the assessment of taxes. 

The taxpayer must contest the FLD or FAN in a timely manner by filing a request for reconsideration or a request for reinvestigation; otherwise, tax assessments become final and executory. The BIR may or may not act on the protest by issuing a Final Decision on Disputed Assessment (FDDA), and the taxpayer may or may elevate the case to the Court of Tax Appeals (CTA).

Where it is established that the BIR duly served a FLD or FAN, what makes or breaks the tax case is the filing or non-filing of the protest letter. The filing of the protest to the FLD or FAN is the most crucial remedy in the pursuit of a taxpayer’s defense. In countless cases decided by the courts, the validity of the tax assessments were upheld not because the government had a basis to assess and collect the taxes, but because the taxpayer failed to dispute the assessment and collection of the taxes within the period and by the manner prescribed by law.

Section 228 of the National Internal Revenue Code (NIRC) of 1997 provides that the tax assessment may be protested by filing a request for reconsideration or reinvestigation within 30 days from receipt of the assessment, and within 60 days from the filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final. In a recent decision, the CTA held that the tax assessment does not become final and executory although the taxpayer chose to submit the protest without supporting documents, since the lack of documentation will only matter when the BIR evaluates the merits of the said protest (CTA Case No. 8185, Third Division, December 3, 2014).

The filing of the protest letter should not only be made; it must also be clearly established. Last week, the CTA dismissed an appeal filed by a taxpayer on the final decision of the BIR, citing lack of jurisdiction. In this case, the facts show that the BIR issued a FAN against the taxpayer, and later, a FDDA. The petitioner filed an appeal on the FDDA with the Commissioner of Internal Revenue. The CTA held that although the petitioner made allegations that it filed a protest letter, no proof was presented. For having failed to file a protest to the FAN within the given period, the FAN attained finality (CTA Case No. 8891, Third Division, February 2, 2015).

Under Revenue Regulation (RR) No. 18-2013, which implements Section 228 of the NIRC, the protest letter should now indicate the nature of the protest, i.e., request for reconsideration or request for reinvestigation, specifying the newly discovered evidence to be presented in case of reinvestigation, the date of the assessment notice, the applicable laws, rules and regulations, and jurisprudence on which the protest is based; otherwise, the protest shall be considered void and without force and effect. The additional requirements laid down in RR No. 18-2013 only highlight how important the exercise of this remedy is.

The two cases and the new regulation cited above illustrate how the filing (and non-filing) of the protest letter can make or break the tax case.

To relate all of these to our song analogy, I would say the protest letter is definitely the chorus. A bad chorus can still make for an enjoyable song, although its ultimate meaning may be difficult to understand. On the other hand, a song without a chorus may have no point at all.

Jean Ross Abenasa-Miso

Let’s Talk Tax

Punongbayan and Araullo

Due process in change of address

TAXES are the “lifeblood” that give real meaning to the existence of the government. Without them, the government would be unable to perform its functions and duties. Taxes are the cost of a functioning government and by extension a civilized society.

Since taxes are critical to its existence, the government is continuously improving its tax collection processes. The Bureau of Internal Revenue (BIR) has been very focused on strengthening its tax collection effort. Under pressure from ambitious revenue targets, the bureau has passed a series of regulations to ensure prompt collection of taxes. The 

motivational  nature of the targets is felt by the public in the form of the BIR’s aggressive approach. It should come as no surprise that the BIR be highly focused on the assessment process. Collections from assessments have traditionally constituted a major share of tax revenue.

To check any tendency towards harsh taxation, the Supreme Court (SC) has been consistent in blocking practices deemed as arbitrary. Justice Isagani Cruz has written: “Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with the law as any arbitrariness will negate the very reason for the government itself.” (CIR v. Algue, Inc.) In other words, taxes should be collected expeditiously, though not to the point where collection methods become preposterous.

In the recent case of Commissioner of Internal Revenue v. BASF Coating + Inks Phils., Inc., G.R. No. 198677, the assessment process once again was the subject of dispute. It involved an invalid assessment preceded by invalid assessment notices, a clear case of denial of due process of law.

Due process is both substantive and procedural in nature. It is substantive in the sense that it acts as a safeguard from arbitrary denial of life, liberty, or property by the government outside the sanction of law. It is also procedural in nature, aiming to protect individuals from the coercive power of government, by ensuring that adjudication processes under valid laws are fair and impartial.

The denial of due process that resulted in the deprivation of property was the core issue underlying the SC decision.

In the BASF case, the BIR was overruled when the SC affirmed a decision by the Court of Tax Appeals, and found no valid assessment due to invalid notices of assessment. Being an invalid assessment, the notice never attained finality and the period for assessment and collection was therefore deemed to have lapsed.

The respondent company, BASF, transferred to a new office without informing the BIR of the move. In 2003, the BIR issued a Final Assessment Notice (FAN) for the taxable year of 1999. However, it was sent to BASF via registered mail to its old address. The company duly protested citing violation of due process and prescription.

Due to inaction on the part of the BIR, the case was elevated to the Court of Tax Appeals (CTA) and then subsequently to the SC. The SC backed the CTA in denying the Petition for Review filed by the BIR, ruling that no valid notices that were sent. Hence, the assessments were also declared void. In effect, the right of the BIR to assess and collect was found to have prescribed.

It is noteworthy that the SC upheld once again the significance of notice as part of due process. What is peculiar about the case is that the BIR was not also properly informed of the change of address of BASF. The BIR cited this circumstance in its Petition before the SC. The BIR also contended that such change of address without prior notice means the prescription clock continues to run, as provided by Sections 203 and 222 of the Tax Code of 1997.

Section 11 of BIR Revenue Regulation No. 12-85 requires the taxpayer to give written notice of any change of address to the Revenue District Officer (RDO) or the district having jurisdiction over his former legal residence and/or place of business. In the event of failure to give notice, any communications sent to the former address are still be considered valid.

The case hinged on the SC’s finding that BIR officers, at various times prior to the issuance of the FAN, had conducted examinations and investigations of BASF’s tax liabilities for 1999 at the latter’s new address. Several communications were also sent to the new address of the respondent prior to the issuance of the FAN including letters and reports of the BIR signed by the revenue officer.

It must not be overlooked that the BIR sent the Preliminary Assessment Notice (PAN) via registered mail to the old address of the respondent but was “returned to sender” as attested by the revenue officer. Despite the return, the BIR still mailed the FAN to the old address. The SC has construed this to mean that the BIR should have been alerted of such change of address. As a result, the Statute of Limitations was not suspended, resulting in the lapsing of the assessment and collection deadline.

A closer look at the decision makes it apparent that both parties failed to give proper notice to each other. The taxpayer was not able to formally notify the BIR of its change of address. On the other hand, the BIR continued to transmit its assessment notices to the “wrong address,” a practice which, combined with the other circumstances, rendered its notices invalid.

This means both parties were “in pari delicto” or “equally at fault,” giving rise to a situation where a court may refuse to intervene. Nevertheless, the weight of justice tilted in favor of the taxpayer.

Let this jurisprudence be our guide in dealing with BIR assessments in the future. It provides an indication that the Supreme Court recognizes the principle laid down in a longstanding ruling from CIR v. Algue, which states: “It is necessary to reconcile the apparent conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved.”

Mark Arthur M. Catabona

Let’s Talk Tax

Punongbayan and Araullo