The right to respond to a preliminary assessment notice

Taxwise Or Otherwise
Carlos R. Mateo

Posted on March 29, 2012

One issue persistently raised by the defense of Chief Justice Corona in his impeachment trial (and for respondents or accused in all court cases) is the observance of the CJ’s right to due process.

Due process is a basic right guaranteed to any person as enshrined in Article III, Section I of the Bill of Rights of the Constitution, which states: "No person shall be deprived of life, liberty and property without due process of law, nor shall any person be denied the equal protection of the laws."

The right to due process is more prominent in a tax assessment as the collection of taxes by the government may deprive a taxpayer of his property. Thus, the Supreme Court (SC), in the case of Roxas v. Court of Tax Appeals, held that:

"The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the ‘hen that lays the golden egg.’ And, in the order to maintain the general public’s trust and confidence in the Government this power must be used justly and not treacherously."

The SC, in the case of CIR v. Metro Star Superama, Inc., G. R. No. 185371 dated Dec. 8, 2010, stated the supremacy of the right to due process over the power of taxation. The pertinent portion of the decision reads:

"In balancing the scales between the power of the State to tax and its inherent right to prosecute perceived transgressors of the law on one side, and the constitutional rights of a citizen to due process of law and the equal protection of the laws on the other, the scales must tilt in favor of the individual, for a citizen’s right is amply protected by the Bill of Rights under the Constitution. Thus, while ‘taxes are the lifeblood of the government,’ the power to tax has its limits, in spite of all its plenitude.

"Hence in Commissioner of Internal Revenue v. Algue, Inc., it was said -- 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 law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently 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. xxx" (underlining supplied)

The due process requirement in the issuance of assessment is provided under Section 228 of the Tax Code. This provision essentially provides that when the Commissioner finds that proper taxes should be assessed against a taxpayer, he shall first notify the taxpayer of his findings. The notice comes in the form of a Preliminary or Pre-Assessment Notice (PAN) containing the facts and law on which the assessment is based. Issuance of the PAN is mandatory except in certain cases specified in the code, and failure to issue the same shall render the assessment void.

Section 228 further states that within a period to be prescribed by the implementing rules and regulations, the taxpayer shall be required to respond to said notice and if the taxpayer fails to do so, the Commissioner shall issue an assessment based on his findings. Under Section 3.1.2 of Revenue Regulations (RR) No. 12-99 which implements Section 228, the taxpayer is given a period of 15 days from receipt of the PAN to submit his/her reply, and failure to do so will consider him/her in default, in which case, the BIR shall issue a formal letter of demand or Final Assessment Notice (FAN).

Clearly, based on these provisions, issuance of the PAN except in the cases mentioned in the law is essential in compliance with the due process requirement in tax assessment cases. What is not clear, however, is whether observance by the BIR of the 15-day period to reply on the part of the taxpayer is also part of the due process requirement. Stated differently, if the BIR issues the PAN and then later sends the FAN without waiting for the taxpayer to submit a position paper within the 15-day period, would this constitute a violation of due process as required under RR 12-99 and thus render the FAN void?

Existing court decisions have varying interpretations of this issue depending on the circumstances.

In at least four cases the court held that the 15-day period allowing the taxpayer to formally reply to the PAN is mandatory and non-observance thereof is considered a violation of due process.

In the case of BPI Data System Corp. vs. CIR CTA Case No. 4530 dated Jan. 12, 1994, the Court of Tax Appeals (CTA) ruled against the validity of the tax assessment in view of the BIR’s failure to give the taxpayer a chance to respond to the PAN before issuing the FAN. Furthermore in the case of Eva Airways vs. CIR, CTA Case No. 5692 dated Sept. 10, 2001 (which was upheld by the SC per G.R. 163043 dated 06 December 2004), the CTA emphasized that the BIR failed to observe the 15-day period since it issued the FAN on the last day of said period. Finally, in the recent case of Puratos Philippines, Inc. vs. CIR, CTA Case No. 6980 dated Oct. 4, 2010 (which became final per CTA Entry of Judgment dated March 23, 2011), the CTA also held that the taxpayer was denied of its right to due process since the FAN was issued on the same day it received the PAN.

On the other hand, certain court decisions were issued upholding the view that the BIR’s failure to give the taxpayer the opportunity to dispute the PAN before issuing the FAN does not necessarily result to violation of due process

In a recent CTA Case (CTA EB No. 631 and 632 dated Dec. 22, 2011), the taxpayer complained that it received the FAN barely 11 days from its receipt of the PAN. However, despite the BIR’s failure to allow the taxpayer to respond to the PAN, the CTA ruled that the FAN is still valid because the taxpayer was able to intelligently contest the FAN and thus was afforded due process.

In another case (Samar I Electric Cooperative, Inc. vs CIR, CTA Case No. 6697 dated May 27, 2008), the CTA stated that if the taxpayer is able to intelligently defend its case, as in this case, then it cannot contradict itself by contending that it was not informed of the law and facts on which the assessment was made.

My humble view is that the 15-day rule allowing the taxpayer to formally reply to the PAN is a procedural requirement that must be strictly followed by the BIR in the observance of the taxpayer’s right to due process. As aptly held by the SC in the Superama case, "the persuasiveness of the right to due process reaches both substantial and procedural rights and the failure of the CIR to strictly comply with the requirements laid down by the law and its own rules is a denial of Metro Star’s right to due process."

Moreover, I believe that the BIR’s failure to give the taxpayer the opportunity to respond to the PAN is akin to the non-issuance of the PAN and therefore a violation of due process. Otherwise, what is the point of requiring the BIR to issue the PAN if the taxpayer will not be allowed to properly respond to it as required under Section 228 of the Tax Code and implemented by RR 12-99?

Resolving a tax assessment is not just dealing with numbers, in most cases, it would require raising technical defenses. Thus, it is essential for a taxpayer to know the tax assessment rules and his or her rights as a taxpayer, to effectively address a tax assessment.

(The author is a director at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of PricewaterhouseCoopers global network. Readers may send feedback via e-mail to 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 such article; the author will be personally liable for any consequent damages or other liabilities.)