Taxwise Or Otherwise

There’s a certain feeling of trepidation that most taxpayers get during tax audits. After all, a tax audit is no laughing matter. It involves flipping back the books and records of prior years to respond to the Bureau of Internal Revenue (BIR), and often, making sense of past transactions for hours on end. But this is all par for the course, and what a complicated course it is.

As people handling tax audits are well aware, a tax investigation has several stages: it begins with the issuance of a Letter of Authority (LoA) by the BIR. If the BIR finds any deficiency taxes during the examination of the taxpayer’s records, a Notice for Informal Conference (NIC) shall be issued inviting the taxpayer for a conference within 30 days from the receipt of the NIC. The conference allows the taxpayer to present its side to the BIR.

If the taxpayer and the BIR fail to resolve the issues at the informal conference stage, a Preliminary Assessment Notice (PAN) shall be issued, to which the taxpayer may reply in writing within 15 days of receipt. Within another 15 days from the taxpayer’s reply to the PAN, the BIR shall issue a Final Assessment Notice and a Formal Letter of Demand (FAN/FLD). The taxpayer must file a protest letter within 30 days from its receipt in the form of either a request for reconsideration or reinvestigation. In case of a reinvestigation, additional supporting documents may be submitted within 60 days from the date of filing the protest.

The Supreme Court (SC) and Court of Tax Appeals (CTA) have held in numerous cases that the failure to observe the above procedural rules constitutes a violation of the taxpayers’ right to due process, which renders the assessment void. The CTA has nullified assessments specifically for the non-observance of the prescribed timeline for the issuance of the assessment notices. Last year, the CTA canceled assessments where the taxpayer received a FAN/FLD before the lapse of the 15-day period from the receipt of the PAN, or worse, where the FAN/FLD was received on the same day as the PAN.

In one of its resolutions earlier last year, the SC again held an assessment void for violating the due process requirement. In this resolution, however, the SC clarified that Section 228 of the Tax Code — the provision which sets out the procedures on tax assessments — gives the taxpayer 60 days from the date of filing its protest to the PAN to submit relevant supporting documents. The SC held that the 60-day period to protest refers to the one made against the PAN and not the FAN.

While this is interesting on several points, it threads through this core question: Can the PAN be the new FAN/FLD?

Section 228 of the Tax Code specifically requires the Commissioner of Internal Revenue (CIR) or an authorized representative to first notify the taxpayer in writing through a pre-assessment notice if the CIR finds that proper taxes should be assessed. Then, the taxpayer is required to respond to the notice within the period prescribed by the regulations. If no response is made, the CIR shall issue an assessment based on his findings. The assessment may be protested by filing a request for reconsideration or reinvestigation within 30 days. Within 60 days from the filing of the protest, all relevant supporting documents should have been submitted; otherwise, the assessment shall become final.

Previously, we’ve associated the PAN as the first notice mentioned in Section 228, and the FAN/FLD to be the assessment subject to the 30-day period to protest and 60-day submission of documents. But if the SC considers the 60 days to apply to the PAN instead of the FAN/FLD, this could imply many things. First, a taxpayer is allowed 30 days to reply to the PAN (instead of 15). Second, the BIR is precluded from issuing the FAN/FLD until the lapse of the 30-day period, or if the taxpayer files a request for reinvestigation, 90 days (i.e., 30 days to protest and 60 days to submit documents). Third, a taxpayer’s failure to reply to the PAN would render the assessment final and executory. By this analogy, the PAN essentially becomes the FAN.

But if the PAN is the assessment subject to protest under Section 228, what then should be considered as the notice prior to the PAN? Could it be the NIC?

From a procedural perspective, this may make sense. The NIC does serve as an initial notification of the BIR’s findings and gives the taxpayer an avenue to respond and come to an agreement with the BIR. Although the previous CIR revoked the requirement for a NIC, this was reinstated in 2018 through Revenue Regulations No. 7-2018. In the period that the NIC formed part of the tax audit rules, the SC repeatedly recognized the NIC as an indispensable part of a tax assessment and held that its non-issuance is a violation of due process.

If the NIC is the pre-assessment notice and the PAN is the new FAN, what does this make the FAN/FLD and Final Decision on Disputed Assessment (FDDA)?

While the above points are all worthy considerations to ponder, it should be noted that the SC resolution earlier this year is merely a minute resolution signed by a Division Clerk of Court. As such, it cannot be considered yet as a binding precedent. The SC has previously ruled that only decisions, which have been duly signed by the members of the Court and certified by the Chief Justice, constitute a binding precedent that forms part of the law.

Nonetheless, as this is still a resolution from our High Court, we cannot discount the possibility that this will be adopted in a decision in the future, or that the BIR would consider this under advisement in future tax audits. For now, though, taxpayers and tax practitioners alike can only take notes and keep this resolution in mind.

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.


Olivia Erika Susa is a senior associate at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

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