Defeated in victory

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Marion D. Castañeda

Taxwise Or Otherwise

Appellate courts, such as the Supreme Court and the Court of Tax Appeals (CTA), are collegial bodies that arrive at decisions only after deliberation, the exchange of views and ideas, and the concurrence of the required majority vote. This mechanism reflects the democratic principles enshrined and protected under our Constitution, especially when contentious cases are elevated to higher courts, particularly those of national interest.

Although the simple majority rule usually governs resolution of cases, a recent CTA En Banc Decision docketed under CTA EB No. 1612 and 1631 dated Nov. 15, 2018 shows an instance when such simple majority may not be sufficient to decide a tax case.

The case involved assessments against a taxpayer for deficiency income tax, value-added tax, withholding taxes, and documentary stamp tax covering the taxable year 2007. Upon judicial appeal, the CTA acting as a Division (CTA Case No. 8478 dated Nov. 3, 2016) partially granted the taxpayer’s petition by cancelling only a certain amount of the deficiency taxes assessed. Both parties – the Commissioner of Internal Revenue (CIR) and the taxpayer – moved for reconsideration of the decision, but the CTA denied both motions in its Resolution dated March 14, 2017. Hence, both parties further elevated the case to the CTA En Banc.

In its decision, the CTA En Banc noted that before it can resolve the issues raised by both parties, it must first determine whether or not the revenue officer who examined the taxpayer was authorized by the CIR or his duly authorized representative through a Letter of Authority (LOA) issued by the Bureau of Internal Revenue (BIR).

In resolving this issue, the tax court applied the ruling in the Medicard case (docketed under G.R. No. 222743 dated April 5, 2017) where the Supreme Court emphasized the significance of an LOA in examining the taxpayer’s books of account/accounting records and in assessing internal revenue taxes. For an audit/examination to be valid, the BIR officials must be the same personnel as approved and authorized to perform such audit/examination under the LOA. Since the officials who performed the tax audit/examination did not obtain prior approval and authorization from the CIR or his authorized representative, the high court cancelled the deficiency tax assessment in the absence of an authority to examine the taxpayer in the first place.

Applying the Medicard ruling to the case at hand, the CTA En Banc noted that the revenue officer who performed the audit/examination was not the same revenue officer named in the LOA. The tax court also noted that no new LOA authorizing the former was issued. Thus, in the absence of an authority to perform a tax audit/examination of the taxpayer’s books and accounting records, the entire amount of the assessed deficiency taxes was declared void.

Notwithstanding the lapses identified that should result in the cancellation of the tax assessment, the CTA En Banc was unable to reverse and set aside the assailed decision and resolution by the CTA in Division. Citing Republic Act No. 1125, as amended by Republic Act No. 9503 (otherwise known as the organic law creating the CTA), “the affirmative votes of five (5) members of the Court En Banc is necessary to reverse a decision of a Division.” In this case, only four out of the seven justices voted to reverse and set aside the decision of the CTA in Division, falling short of the five-vote requirement under the law, despite four being a majority of the seven justices.

As a result, the petitions of both the CIR and the taxpayer were dismissed, and the earlier decision and resolution of the CTA in Division were affirmed by the CTA En Banc.

One might ask, what is the rationale for the “five-vote requirement” of the CTA En Banc to overturn decisions of the CTA in Division? As a collegial body, the CTA consists of nine justices when sitting En Banc; hence, at least five votes are needed to reach a majority. However, in this particular instance, the CTA En Banc had only seven justices – four voted to overturn the appealed decision and resolution; two voted to maintain them; and one justice was on wellness leave.

To summarize, initial findings showed that the deficiency tax assessment was void with a majority vote of four justices who agreed to reverse the appealed decision. However, the CTA En Banc was unable to rectify the disputed decision due to the five-vote requirement required to reverse decisions on appeal from the CTA in Division. By way of remedy, the taxpayer has no recourse but to further appeal the decision of the CTA En Banc (incurring more costs, financially or otherwise, in the process), despite clear findings to support a decision favorable to the taxpayer.

While the cited case is rare, it is this author’s view that substantial justice should not be sacrificed by mere technicalities where established facts and applicable laws show that there is basis to amend or set aside a misplaced finding. When a decision has substance but cannot be implemented, it is a hollow decision — sadly, a defeat in victory.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.


Marion D. Castañeda is a manager belonging to the tax services department of Isla Lipana & Co., the Philippine member firm of the PwC network.

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