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