Taxation is the lifeblood of the
government. Through the collected taxes, the government is able to fund
the increasing need of its people for infrastructure, education, health,
etc. The Bureau of Internal Revenue (BIR) is the Philippine
government’s largest revenue collecting arm. For this year alone, the
Bureau was assigned a P1.8 trillion tax collection target.
Throughout the years, the BIR has
implemented various programs to improve its tax collection efforts. In
2003, it issued Revenue Memorandum Order (RMO) Nos. 30-2003 and 42-2003
which provided policies and guidelines to detect tax leaks by matching
data from the BIR’s Integrated Tax System (ITS) and data from third
party resources. Discrepancies generated through these matchings were
used to unearth what could potentially be undeclared sales and/or
over-claimed purchases by various taxpayers.
This “no-contact-audit approach” enables the BIR to use computerized
matching to compare data from records or various returns filed by a
taxpayer against those gathered from its suppliers or customers, and
even those reported to other agencies, particularly the Bureau of
Customs. Taxpayers with noted discrepancies are then informed of the
findings through the issuance of a Letter Notice (LN) by the BIR.
Consequently, such taxpayers are given 120 days to reconcile the
inconsistencies; otherwise, deficiency taxes will be assessed.
In one of its recent decisions, the Supreme Court (SC) held that the
absence of a Letter of Authority (LOA), makes the assessment
unauthorized and thus, void. This is despite the prior issuance of an
LN. According to the court, the BIR’s failure to issue an LOA
constituted a violation of due process and was considered fatal to the
tax audit.
The SC differentiated an LOA from an LN, noting that LNs only serve as
notice of any discrepancy to the taxpayers and is not in any way a
substitute for an LOA which grants authority to the revenue officers to
examine the books of the taxpayers. The LN operates similarly to a
Notice of Informal Conference, an erstwhile requirement which was
removed from the BIR’s tax audit process when the Bureau issued its
revised regulations for tax audits back in 2013.
The SC stressed that the BIR must issue an LOA prior to issuing a
Preliminary Assessment Notice (PAN), a Final/Formal Assessment Notice
(FAN), or a Final Decision on Disputed Assessment (FDDA) to the
taxpayer; otherwise, the assessment is rendered void for lack of due
process.
This decision overturns the earlier ruling of the Court of Tax Appeals
(CTA) en banc which held that the LN in essence, can serve as proof of
the revenue officer’s authority to examine the books of the taxpayer.
The court pointed out that the taxpayer can no longer question the
validity of the tax assessment on the ground of lack of an LOA since the
BIR had provided the requisite legal and factual bases of the
deficiency tax being assessed. In the higher interest of justice, the SC
considered the absence of the LOA as fatal to the case, underscoring
the importance of due process.
The SC’s decision to reverse the CTA ruling thereby effectively negates
RMO No. 55-2010, which was issued by the BIR based on the earlier CTA
ruling. As it is, the BIR has yet to issue guidelines on this recent
decision by the SC.
Due process is a basic right guaranteed to all persons under the
Philippine Constitution. It is an elementary rule that no person shall
be deprived of property without due process of law. To boost taxpayers’
compliance with the tax laws and regulations, the government, through
its tax authorities, must continually build trust and confidence among
taxpayers and in the society in general.
The pronouncement of the SC brings to light, once again, the
significance of due process in taxation. While it is imperative for the
tax authorities to generate revenues through exaction of taxes, the
government’s power to tax must be exercised with justice. This can only
be achieved when collection of taxes exercised through programs are
implemented with reasonable requirements and within the bounds of the
law.
However steep the BIR’s collection target is, it must be reached only
through acts that are within the bounds of the Bureau’s authority.
The views or opinions presented 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.
Kathrine Joy S. Capales is an Assistant Manager at the Tax Services
Department of Isla Lipana & Co., the Philippine member firm of the
PwC network.
+63 (2) 845-2728
kathrine.joy.capales@ph.pwc.com
source: Businessworld
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