While it is indisputable that taxes are vital to the country’s
growth, one of the most unpleasant experiences for a taxpayer is to receive a
large and baseless assessment which requires a defense. Those experiencing it
for the first time may be filled with fear and panic. Further aggravating a
taxpayer’s situation is the fact that during discussions, the tax examiners may
continue to insist on their position despite clear and factual evidence to the
contrary.
Indeed, a tax assessment issued by the Bureau
of Internal Revenue (BIR) is an unavoidable and serious matter that one cannot
ignore. As such, the key to effectively handling tax assessments is to know the
process and the various legal remedies available to a taxpayer. Although it is
recommended that one obtain the services of a tax professional, it would be
prudent for a taxpayer to have a basic idea, not only of the BIR’s procedures,
but more importantly of the defenses which it may raise to protest an assessment.
Below are examples of possible defenses which a taxpayer may raise against a couple of common issues raised by a tax examiner during a tax investigation.
Readers may be aware that the BIR conducts computerized consolidation and matching of data contained in a taxpayer’s tax returns and reports against those submitted by its customers and suppliers (i.e., the BIR’s Reconciliation of Listing for Enforcement (RELIEF) System). Any discrepancies are then considered grounds for deficiency tax assessment. In such cases, the concerned taxpayer may raise the defense that the assessment is based on mere presumption. The use of such ‘presumption’ as the sole basis for assessing deficiency taxes does not satisfy the due process requirement under the Tax Code. An assessment, to be valid, must have legal and factual bases. It cannot be based on mere conjecture no matter how reasonable or logical the rationale may be behind the said presumptions.
In fact, in one recent case, our Court of Tax Appeals (CTA) held that this type of assessment lacks basis, especially if a taxpayer was not provided with the corresponding information reported in the tax returns and reports filed by its customers or suppliers. As explained in that decision, such computerized data matching program of the BIR does not include the checking of the substance or contents in the returns or reports generated from the BIR’s system against other source documents. Accordingly, these data are considered to be doubtful, inconclusive and unreliable since the tax examiners do not, in anyway, validate the information fed into the system.
Another common issue raised by tax examiners against taxpayers relates to net operating loss carryover (NOLCO) that under the law, may be carried over and claimed as a deduction by taxpayers in the next three succeeding years. During tax audits, examiners disallow taxpayers from utilizing these available NOLCO on the presumption that these have been utilized in the succeeding period. In a 2013 tax assessment case, the CTA ruled that such disallowance is improper. Taxpayers should be allowed to claim the losses/credit in the current year under audit and, at most, be assessed only in the succeeding year. While it was not mentioned in the said case, it can also be inferred that the court considered the assessment to be based mainly on the presumption that the taxpayer already benefitted from the “disallowed” credit.
As mentioned earlier, assessments cannot be based on mere presumption. In a 2015 tax assessment case, the CTA maintained its position regarding the improper disallowance of NOLCO. In addition, the court ruled similarly on the proposed disallowance of the excess Minimum Corporate Income Tax or MCIT carried over to the succeeding period.
Any of the above defenses notwithstanding, a taxpayer under audit must invariably know whether the BIR complied with the proper procedures for tax assessments as laid down by our tax laws and regulations. Failure of the tax authorities to comply with their own rules and regulations is a violation of a taxpayer’s constitutionally protected right to due process, which a taxpayer may use as a ground to invalidate an assessment.
Although deficiency tax assessments are presumed correct and made in good faith, it should not be forgotten that an assessment must be conducted in accordance with our tax laws and regulations. Otherwise, such presumption of correctness can be overturned. This is where taxpayers may find some comfort -- in the knowledge that only valid assessments that are issued according to the law are a matter of real concern.
The views or opinions in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.
Jocelyn T. Tsang is a Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network. jocelyn.t.tsang@ph.pwc.com
Below are examples of possible defenses which a taxpayer may raise against a couple of common issues raised by a tax examiner during a tax investigation.
Readers may be aware that the BIR conducts computerized consolidation and matching of data contained in a taxpayer’s tax returns and reports against those submitted by its customers and suppliers (i.e., the BIR’s Reconciliation of Listing for Enforcement (RELIEF) System). Any discrepancies are then considered grounds for deficiency tax assessment. In such cases, the concerned taxpayer may raise the defense that the assessment is based on mere presumption. The use of such ‘presumption’ as the sole basis for assessing deficiency taxes does not satisfy the due process requirement under the Tax Code. An assessment, to be valid, must have legal and factual bases. It cannot be based on mere conjecture no matter how reasonable or logical the rationale may be behind the said presumptions.
In fact, in one recent case, our Court of Tax Appeals (CTA) held that this type of assessment lacks basis, especially if a taxpayer was not provided with the corresponding information reported in the tax returns and reports filed by its customers or suppliers. As explained in that decision, such computerized data matching program of the BIR does not include the checking of the substance or contents in the returns or reports generated from the BIR’s system against other source documents. Accordingly, these data are considered to be doubtful, inconclusive and unreliable since the tax examiners do not, in anyway, validate the information fed into the system.
Another common issue raised by tax examiners against taxpayers relates to net operating loss carryover (NOLCO) that under the law, may be carried over and claimed as a deduction by taxpayers in the next three succeeding years. During tax audits, examiners disallow taxpayers from utilizing these available NOLCO on the presumption that these have been utilized in the succeeding period. In a 2013 tax assessment case, the CTA ruled that such disallowance is improper. Taxpayers should be allowed to claim the losses/credit in the current year under audit and, at most, be assessed only in the succeeding year. While it was not mentioned in the said case, it can also be inferred that the court considered the assessment to be based mainly on the presumption that the taxpayer already benefitted from the “disallowed” credit.
As mentioned earlier, assessments cannot be based on mere presumption. In a 2015 tax assessment case, the CTA maintained its position regarding the improper disallowance of NOLCO. In addition, the court ruled similarly on the proposed disallowance of the excess Minimum Corporate Income Tax or MCIT carried over to the succeeding period.
Any of the above defenses notwithstanding, a taxpayer under audit must invariably know whether the BIR complied with the proper procedures for tax assessments as laid down by our tax laws and regulations. Failure of the tax authorities to comply with their own rules and regulations is a violation of a taxpayer’s constitutionally protected right to due process, which a taxpayer may use as a ground to invalidate an assessment.
Although deficiency tax assessments are presumed correct and made in good faith, it should not be forgotten that an assessment must be conducted in accordance with our tax laws and regulations. Otherwise, such presumption of correctness can be overturned. This is where taxpayers may find some comfort -- in the knowledge that only valid assessments that are issued according to the law are a matter of real concern.
The views or opinions in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.
Jocelyn T. Tsang is a Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network. jocelyn.t.tsang@ph.pwc.com
Taxwise
or Otherwise : Jocelyn T. Tsang
Economy
: Business World
November
25, 2015
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