Imagine driving your car on a clear sunny afternoon, when suddenly, you are blocked and signaled to pull over by an apparent traffic enforcer in civilian clothing. To your surprise, he asks for your driver’s license and hands you a ticket for an alleged violation. Not recognizing his authority as a traffic enforcer, you refuse to give your license and question his right to apprehend you. However, he insists. Fortunately, this situation is not likely to happen; but if it does, you can expect it to be unpleasant.
The point in question is the authority of the person telling you that you have violated a rule. From a tax perspective, the issue of authority was tackled in the case of Medicard Philippines, Inc. (Medicard) vs. Commissioner of Internal Revenue (G.R. No. 222743, April 5, 2017), wherein the authority of the Bureau of Internal Revenue (BIR) to assess Medicard was challenged. In this case, the BIR, upon finding discrepancies between Medicard’s income Tax Returns (ITRs) and value-added tax (VAT) Returns for 2006, issued a Letter Notice (LN) to Medicard. Thereafter, without subsequently issuing a 2006 Letter of Authority (LoA), the BIR then issued a Preliminary Assessment Notice (PAN) and Formal Assessment Notice (FAN) against Medicard for an alleged deficiency VAT.
The case went through the rounds until it reached the Supreme Court (SC). The SC pronounced that, as the BIR assessed Medicard by virtue of a mere LN, and not by virtue of an LoA, the BIR’s assessment was void. This SC decision was recently rehashed and highlighted by the BIR in its Revenue Memorandum Circular (RMC) No. 75-2018, which was issued to emphasize the doctrinal rule enunciated by the SC in the Medicard case on the statutory requirement of an LoA.
How does a Letter Notice basically differ from a Letter of Authority?
In issuing an LN, the BIR, in effect, is performing a no-contact-audit. Here, the BIR performs a computerized matching of data from the taxpayer’s submitted tax returns and information. In case the comparison reveals some discrepancies, the taxpayer will be informed by the BIR through a Letter Notice. An LoA, on the other hand, is the authority given to the appropriate revenue officer assigned to perform assessment functions. The LoA empowers or enables the revenue officer to examine the books of account and other accounting records of a taxpayer to collect the correct amount of tax.
The SC, in the Medicard case, and subsequently, the BIR, by issuing RMC 75-2018, recognize that issuing an LN to assess a taxpayer is not valid. No assessments can be issued or no assessment functions or proceedings can be done without the prior approval and authorization of the Commissioner of the BIR or his duly authorized representative through an LoA. The concept of an LoA is therefore clear and unequivocal. Any tax assessment issued without an LoA is a violation of the taxpayer’s right to due process and is therefore “inescapably void.”
Clearly, a revenue officer must be clothed with authority before proceeding with an examination or assessment. The authority must be embodied in an LoA, and not in the form of a mere LN to the taxpayer. An LN is not an authority to conduct an audit or examination of the taxpayer leading to the issuance of deficiency assessments. Due process demands that after an LN has served its purpose, the revenue office should have properly secured an LoA before proceeding with the further examination and assessment of taxpayer.
The key word in RMC 75-2008 is “authority.” The BIR examiners should be properly authorized under the tax rules in order to validly assess a taxpayer. It is also noteworthy that, in the RMC, the BIR stated that, to help forestall any unnecessary controversy and to encourage due observance of judicial pronouncements, any examiner or revenue officer initiating tax assessments or performing assessment functions without an LoA shall be subject to appropriate administrative sanctions. This latter provision would certainly give teeth to the implementation of the issuance.
Thus, unless an LoA is served to the taxpayer, any findings or issues the BIR examiners may find during their audit are not valid, since in the first place, no examination or audit should have happened due to the tax agents’ lack of authority.
It is a welcome development on the part of the taxpayers that the BIR, by issuing RMC 75-2018, is showing its commitment to strictly observe due process in assessment cases. Nonetheless, an LN cannot just be set aside by the taxpayers even if it is not equivalent to an LoA, as the findings in the said LN can be a possible source of a BIR assessment once the BIR issues a subsequent LoA. Knowledge is power. Taxpayers, if armed with the proper knowledge of how to react to the BIR’s assessment procedures, can better prepare for and withstand a future BIR audit.
Jenica Angeles is a senior of the Tax Advisory and Compliance of P&A Grant Thornton.