Against this backdrop, taxpayers should expect more frequent and aggressive tax audits.
In addition to the regular tax audit involving an investigation of the taxpayer’s records, the BIR will likely continue its so called “no-contact audit approach”, which involves the computerized matching of sales and purchases as reported by sellers and buyers in their tax and information returns, and importations per taxpayers’ returns and per records of the Bureau of Customs.
Discrepancies arising from the computerized matching are communicated to the taxpayer through the issuance of a letter notice (LN). If the taxpayer is not able to reconcile the alleged discrepancies, such may be used as a basis for deficiency tax assessments.
However way the mismatch goes, the BIR may attempt to go after either one of the parties.
For instance, if one taxpayer’s reported sales are matched with a second taxpayer’s reported purchases and the latter amount is found to be higher, the corresponding discrepancy may be considered as undeclared sales on the part of the first taxpayer. In case the results were reversed and the first taxpayer’s reported sales are found to be higher than the reported purchases by the other taxpayer, the latter is not off the hook as the BIR may then treat the discrepancy as undeclared purchases on the part of the second taxpayer. In either case, the BIR may treat the resulting discrepancy as subject to deficiency income and VAT assessments.
Particularly for the second scenario, is such an approach valid?
Under Section 229 of the Tax Code and its implementing regulations, an assessment must have legal and factual bases which must be communicated to the taxpayer in writing in order to be valid. In other words, it cannot be based on a presumption. As held by the Supreme Court in one case (G.R. No. L-46644 dated 11 September 1987), an “assessment should not be based on mere presumptions no matter how reasonable or logical said presumptions may be. The assessment must be based on actual facts. The presumption of correctness of assessment being a mere presumption cannot be made to rest on another presumption.”
In one case (CTA Case No. 7540 dated 20 May 2010), the Court of Tax Appeals (CTA) held that no taxable income results from undeclared expenses because it rests on mere presumption. According to the court, even if the alleged undeclared expenses were to be considered as income, the same would be offset by recording the equivalent expenses. Hence, such alleged undeclared expenses will not result in taxable income.
Recently, the CTA En Banc sustained an earlier CTA decision canceling the deficiency income tax and VAT assessment, which were based on BIR findings that the taxpayer had under-declared purchases or unaccounted expenses (CTA EB No. 1054 dated 13 January 2015). However, since the alleged discrepancy arose from an LN, no evidence was submitted by the BIR showing that income resulted from the alleged unaccounted purchases/expenses and that said income was actually received by the corporation.
The CTA considered the assessment as lacking in legal and factual basis. According to the tax court, mere presumption of income based on under-declared purchases/unaccounted expenses which supposedly translate into income is not sufficient to sustain the validity of an assessment. Citing jurisprudence (G.R. 108576 dated 20 January 1999), the CTA reiterated that in order for a taxpayer to be validly assessed for deficiency income tax, the following elements should be present: a) clear proof of gain or profit, b) the gain or profit was received by the taxpayer, actually or constructively, and c) the income is not exempted by law or treaty from income tax.
In the same token, the CTA held that no deficiency VAT assessment should arise from the under-declared purchases. Under Section 105 of the Tax Code, VAT is imposed on the seller of goods and assessed on the “gross selling price or gross value in money of the goods or properties sold”. When assessing deficiency VAT, the CTA ruled that the BIR must prove that the taxpayer was or ought to be paid in consideration for a sale, and not when said taxpayer purchases or disburses cash to purchase goods or properties. Thus, there is no basis to impose deficiency VAT merely on the basis of alleged under-declared purchases.
Notwithstanding the CTA decision, I sincerely believe that the BIR should still pursue its no-contact audit approach as it helps in identifying taxpayers who may be amiss in paying correct taxes. However, such approach should only be used as a tool in determining which taxpayers should be subjected to examination, instead of as an outright basis for deficiency taxes. Deficiency tax assessments should be based on an actual audit of the taxpayer’s records and not on mere matching between taxpayer’s records with third party information.
Individually (and collectively), we can assist the BIR (and our beloved country) to meet its collection target by paying our taxes correctly. With proper record-keeping and faithful compliance with the tax rules (of course, having a reliable tax adviser may prove invaluable in understanding and keeping updated on the rules), a BIR examination need not be stressful nor complicated.
Carlos R. Mateo is a director at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
(02) 845-2728
carlos.mateo@ph.pwc.com
In addition to the regular tax audit involving an investigation of the taxpayer’s records, the BIR will likely continue its so called “no-contact audit approach”, which involves the computerized matching of sales and purchases as reported by sellers and buyers in their tax and information returns, and importations per taxpayers’ returns and per records of the Bureau of Customs.
Discrepancies arising from the computerized matching are communicated to the taxpayer through the issuance of a letter notice (LN). If the taxpayer is not able to reconcile the alleged discrepancies, such may be used as a basis for deficiency tax assessments.
However way the mismatch goes, the BIR may attempt to go after either one of the parties.
For instance, if one taxpayer’s reported sales are matched with a second taxpayer’s reported purchases and the latter amount is found to be higher, the corresponding discrepancy may be considered as undeclared sales on the part of the first taxpayer. In case the results were reversed and the first taxpayer’s reported sales are found to be higher than the reported purchases by the other taxpayer, the latter is not off the hook as the BIR may then treat the discrepancy as undeclared purchases on the part of the second taxpayer. In either case, the BIR may treat the resulting discrepancy as subject to deficiency income and VAT assessments.
Particularly for the second scenario, is such an approach valid?
Under Section 229 of the Tax Code and its implementing regulations, an assessment must have legal and factual bases which must be communicated to the taxpayer in writing in order to be valid. In other words, it cannot be based on a presumption. As held by the Supreme Court in one case (G.R. No. L-46644 dated 11 September 1987), an “assessment should not be based on mere presumptions no matter how reasonable or logical said presumptions may be. The assessment must be based on actual facts. The presumption of correctness of assessment being a mere presumption cannot be made to rest on another presumption.”
In one case (CTA Case No. 7540 dated 20 May 2010), the Court of Tax Appeals (CTA) held that no taxable income results from undeclared expenses because it rests on mere presumption. According to the court, even if the alleged undeclared expenses were to be considered as income, the same would be offset by recording the equivalent expenses. Hence, such alleged undeclared expenses will not result in taxable income.
Recently, the CTA En Banc sustained an earlier CTA decision canceling the deficiency income tax and VAT assessment, which were based on BIR findings that the taxpayer had under-declared purchases or unaccounted expenses (CTA EB No. 1054 dated 13 January 2015). However, since the alleged discrepancy arose from an LN, no evidence was submitted by the BIR showing that income resulted from the alleged unaccounted purchases/expenses and that said income was actually received by the corporation.
The CTA considered the assessment as lacking in legal and factual basis. According to the tax court, mere presumption of income based on under-declared purchases/unaccounted expenses which supposedly translate into income is not sufficient to sustain the validity of an assessment. Citing jurisprudence (G.R. 108576 dated 20 January 1999), the CTA reiterated that in order for a taxpayer to be validly assessed for deficiency income tax, the following elements should be present: a) clear proof of gain or profit, b) the gain or profit was received by the taxpayer, actually or constructively, and c) the income is not exempted by law or treaty from income tax.
In the same token, the CTA held that no deficiency VAT assessment should arise from the under-declared purchases. Under Section 105 of the Tax Code, VAT is imposed on the seller of goods and assessed on the “gross selling price or gross value in money of the goods or properties sold”. When assessing deficiency VAT, the CTA ruled that the BIR must prove that the taxpayer was or ought to be paid in consideration for a sale, and not when said taxpayer purchases or disburses cash to purchase goods or properties. Thus, there is no basis to impose deficiency VAT merely on the basis of alleged under-declared purchases.
Notwithstanding the CTA decision, I sincerely believe that the BIR should still pursue its no-contact audit approach as it helps in identifying taxpayers who may be amiss in paying correct taxes. However, such approach should only be used as a tool in determining which taxpayers should be subjected to examination, instead of as an outright basis for deficiency taxes. Deficiency tax assessments should be based on an actual audit of the taxpayer’s records and not on mere matching between taxpayer’s records with third party information.
Individually (and collectively), we can assist the BIR (and our beloved country) to meet its collection target by paying our taxes correctly. With proper record-keeping and faithful compliance with the tax rules (of course, having a reliable tax adviser may prove invaluable in understanding and keeping updated on the rules), a BIR examination need not be stressful nor complicated.
Carlos R. Mateo is a director at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
(02) 845-2728
carlos.mateo@ph.pwc.com
source: Businessworld
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