Taxwise Or Otherwise
By Maria Jonas Yap
“No demand, no delay.” This rule is spelled out by Article 1169 of the Civil Code, where those obliged to deliver or to do something incur a delay from the time the obligee (or the person to whom an obligation is owed) judicially or extrajudicially demands fulfillment of the obligation.
In a situation where a debtor defaults on his payment of a loan, the law requires that a demand has to be made by the creditor before the debtor can be considered delayed on his payments, except if the contract itself provided that no demand is necessary for delay to exist. If no demand was made, then the loan has not yet become due and demandable, and any foreclosure of property used as collateral for the loan would be considered premature.
When it comes to tax assessments, however, there is a twist to the rule. In the case of assessment notices, if there is no demand for payment, not only is there no delay on the part of the taxpayer, but there is actually no valid assessment to speak of.
This position was reiterated in a recent decision of the Court of Tax Appeals (CTA Case No. 8694 dated June 28, 2018) where the deficiency tax assessment was set aside and cancelled because the Final Assessment Notice (FAN) did not contain a specific date or period within which the alleged tax liabilities must be paid. In that decision, the court emphasized that the due date for payment of the tax liabilities is indispensable in an assessment as it dictates the time when the penalties, surcharge and interest begin to accrue. If the date of payment is uncertain, then there is no definite demand on the taxpayer to immediately pay the assessed tax liabilities.
The due process requirements in the issuance of deficiency taxes are laid down in Revenue Regulations (RR) No. 12-1999, as amended by RR Nos. 18-2013 and 7-2018. The regulations provide that a formal letter of demand (FLD) and FAN calling for the payment of deficiency taxes shall state the facts, laws, rules and regulations or jurisprudence on which the assessment is based; otherwise, the notices shall be void. The taxpayer shall have 30 days from receipt of the FLD and FAN to file an administrative protest.
Significantly, the Supreme Court in earlier rulings categorically pronounced that an assessment should contain not only the detailed computation of tax liabilities, but also a demand for payment within a prescribed period. It further mentioned that an assessment, in the context of the National Internal Revenue Code, is “a written notice and demand made by the Bureau of Internal Revenue (BIR) to the taxpayer for the settlement of the due tax liability that is there: definitely set and fixed.”
Applying the decision of the Supreme Court, merely notifying the taxpayer of his tax liabilities is not enough. The FLD/FAN should not only show a computation of tax liabilities and the details of the assessment, but it should also contain a clear unequivocal demand for payment by indicating the definite date or period for payment of the assessed taxes. The Supreme Court, in effect, provided an additional requirement for an assessment to be considered valid, apart from those laid down under the regulations.
Referring back to the recent CTA case, the deficiency tax assessment was cancelled because it did not comply with the additional requirement that there should be sufficient demand for payment by the BIR. In this case, there was an undated FAN assessing the taxpayer for deficiency taxes and this was deemed null and void because the due dates on the assessment notices for all assessment items were left blank or unspecified.
What can be gathered from this case is that taxpayers can raise a defense against an assessment if there is no demand for payment made. Failure to comply with the additional requirement of demand proves fatal to the assessment. Thus, even if the issues raised in the assessments have merit, taxpayers can still check if the FLD/FAN contains a specific due date for the payment of the deficiency taxes. If there is none, they can protest that the assessed amount is not collectible because payment was not actually demanded by the BIR. Applying the decisions of the courts, in such cases, taxpayers can firmly say, “No demand, no pay.”
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.
Maria Jonas Yap is a Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
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