Last June, no less than the Court of Tax Appeals (CTA) reminded us of the truth and application of this time-honored doctrine of law in an action for recovery of erroneously paid taxes (CTA Case No. 8147 dated 22 October 2014 as amended on June 10, 2015). In this case, the taxpayer was issued a Preliminary Assessment Notice (PAN) in connection with a tax investigation covering the taxable year 2002. Due to the execution of four consecutive waivers, the PAN was issued only in 2008, or five years after the filing of the tax return.
To stop the further accrual of interest charges, the taxpayer decided to pay the assessed deficiency taxes a day after it received an advanced copy of the PAN. It then informed the Bureau of Internal Revenue (BIR) that the payment was without prejudice to its right to file a protest upon receipt of the Formal Letter of Demand (FLD)/Final Assessment Notice (FAN). The taxpayer, thereafter, filed a reply to the PAN.
Without formally ruling on the reply to the PAN, the BIR sent instead a letter informing the taxpayer that it had lost the right to submit additional documents in support of its reply. In response, the taxpayer filed an administrative claim for refund with the BIR, and thereafter, a judicial claim before the CTA.
There are a few peculiar things that set this case apart from other tax refund cases. First, the taxpayer effected a payment under protest, a scenario which is not explicitly provided for by the current tax laws and regulations. Second, such payment was made after the issuance of a PAN, but before the issuance of an FLD/FAN. Last, and probably the most curious of all, no FLD/FAN was ever issued by the CIR.
The BIR’s opposition to the claim was mainly based on the argument that the payment made by the taxpayer after the issuance of the PAN dispensed with the need for the issuance of an FLD/FAN. Hence, the assessed amount in the PAN and the settlement by the taxpayer was valid.
In granting the claim, the Court determined that since there was no issued FLD/FAN, the amount paid by the taxpayer can be considered as erroneously collected and, therefore, a proper subject of a claim for refund. Citing a Supreme Court decision, the CTA defined “tax erroneously collected” as one collected without statutory authority.
Why is there emphasis on the need for an FLD/FAN? A PAN merely serves as a notice of the BIR’s initial findings. In fact, even if the taxpayer fails to reply to such preliminary notice, Section 229 of the Tax Code does not provide for the findings to become automatically final. Only the final assessment is at risk of becoming final, executory, and legally demandable, if ignored. Hence, without an FLD/FAN, any payment made to settle purported deficiency taxes is an erroneous payment which may refunded.
The BIR also argued that the PAN was valid and enforceable because the payment was voluntary. According to the BIR, this amounted to an admission on the part of the taxpayer of the validity of the deficiency taxes set forth in the PAN, making the issuance of an FLD/FAN unnecessary.
In rejecting such a contention, the CTA ruled that payment by the taxpayer cannot be construed as an act of conceding to the alleged tax liability especially when the taxpayer reserved the right to file a protest to the FLD/FAN. The taxpayer cannot be faulted for taking the initiative of availing of the obvious remedy of immediate payment in order to stop the accrual of interest. The taxpayer did not show any intention of relinquishing any of its rights, much more admitting liability for all deficiency taxes set forth in the PAN.
Incidentally, regardless of whether the erroneous payment was made without reservation should not affect a taxpayer’s entitlement to claim for refund. Based on Section 229 of the Tax Code, a claim for refund may be given due course whether or not the tax was paid under protest or duress.
There being no final assessment issued within three years from the time that the taxpayer filed its 2002 returns, the Court ultimately ruled that the right of the BIR to assess deficiency taxes had long prescribed. The CTA did not afford weight to any of the four waivers executed by the taxpayer because they were defective in form and non-compliant with statutory requirements; thus, the waivers had no legal effect.
Finally, one might cast doubt on the good faith of the taxpayer in filing a claim for refund and question the fairness of the CTA’s decision. It is, after all, well-settled that taxes are the lifeblood of the government and should be collected without unnecessary hindrance. However, the lingering inaction of the tax authorities cannot be gainsaid. Worse, such inaction (spanning a period of one year and 10 months) on the taxpayer’s reply to the PAN was due to the wrongful application of its own rules. It is rather unfortunate that the government was deprived of additional funds only because the performance of certain public officers fell below the expected level. In this case, while the BIR is authorized to assess taxpayers with deficiency taxes, it must do so consistent with the requirements of due process. Otherwise, the tax shall be considered wrongfully assessed and collected and, therefore, invalid.
The course of action taken by the taxpayer in recovering what it had erroneously paid cannot be overly criticized as well. The taxpayer resorted to an available remedy by setting forth, one by one, the ultimate facts that make up its cause of action and by filing its claim within the time allowed by law.
Indeed, the taxpayer may have benefited from the shortcomings of the tax authorities, but we need to remember that a taxpayer has no obligation to remind them of the duties they may have overlooked.
In a case where the two parties have their respective rights on the one hand, the right to recover taxes erroneously collected and, on the other, the right to assess and collect deficiency taxes-the party who exercised his right with diligence shall prevail. Those who are remiss in the performance of their duties should suffer the consequences of their action, or in this case, inaction. In this regard, the BIR should ensure the regular performance of its duties because the consequences shall ultimately be shared not only among its ranks, but also with the public at large.
Ma. Eliza Christine C. Gomez is a senior consultant at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
source: Businessworld
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