Taxwise or Otherwise

Have you ever felt silenced after your explanation was left unheard? Perhaps, as a child, you were scolded without getting a chance to defend yourself; as an adult, perhaps you were handed a traffic violation ticket for an infraction you were wrongly accused of.

In tax assessment cases, taxpayers often feel anxious when investigated, a reaction that shouldn’t be the case for one whose transactions are above board. However, this sense of despair may be rooted in the fear of an uneven hand in judgment or perhaps the lack of a transparent system of assessment.

To appreciate this problem, let us look at the assessment process. Under Revenue Regulations (RR) No. 12-1999 as amended by RR Nos. 18-2013, 7-2018 and 22-2020, after the Bureau of Internal Revenue (BIR) has conducted an examination of the books of account and other accounting records of the taxpayer, a Notice of Discrepancy will be issued informing the taxpayer of the preliminary findings.  Should the revenue officers and the taxpayer fail to agree on the issues, the findings shall be indorsed for the issuance of the Preliminary Assessment Notice (PAN).  

The PAN should show in detail the facts, applicable law, regulations, or jurisprudence on which the assessment is based.  The taxpayer has 15 days from the receipt of the PAN to file a written response.  If the taxpayer fails to respond or submit a letter disagreeing with the findings, a Formal Letter of Demand and Final Assessment Notice (FLD/FAN) is then issued.  The FAN should likewise contain the facts and the applicable law, regulations or jurisprudence on which the assessment is based.  The taxpayer may thereafter file a request for reinvestigation or reconsideration, within 30 days from the receipt of the FAN/FLD, and if applicable, submit supporting documents within 60 days from the submission of the protest letter.  The BIR’s decision on the taxpayer’s protest will be communicated through another document called the Final Decision on Disputed Assessment (FDDA).

While the rules acknowledge the taxpayer’s remedy of submitting a written reply to the PAN, the question is how much weight does the BIR accord to the taxpayer’s arguments and documents? In a Court of Tax Appeals (CTA) case decided last year, the Court noted that the explanations and/or documents provided in the taxpayer’s reply to the PAN were left unheard as the FAN merely reiterated the findings in the PAN, with only an updated computation of the interest.  The BIR affirmed its initial position without giving any reason for rejecting the taxpayer’s explanations. For failure to state the facts, law, rules, or jurisprudence upon which the assessment is based, the CTA concluded that the taxpayer’s right to due process was violated, rendering the assessment null and void.

That decision was likewise echoed in the recent tax court case (CTA Case No. 9267, 28 May 2021) ruling for the cancellation and withdrawal of assessment for deficiency value-added tax (VAT).  In this case, the taxpayer received the PAN, with attached details of discrepancies, notifying the taxpayer of the proposed assessment for deficiency VAT.  Within the 15-day reglementary period, the taxpayer filed a request for reconsideration of the PAN.  The taxpayer explained and addressed each line item or finding of the BIR and endeavored to refute the alleged deficiency assessment as being void for lack of legal and factual bases.  On the fourth day after the filing of the request for reconsideration with the BIR, the taxpayer received an FLD, with an attached FAN, containing the very same issues and the same amount of deficiency taxes stated in the PAN. Further, the FLD/FAN did not even address or cite the arguments raised by the taxpayer in its request for reconsideration.

In this respect, the Court held that the right of the taxpayer to answer the PAN carries with it the correlative duty on the part of the BIR to consider the taxpayer’s response. The issuance of the FLD/FAN without even considering the side of the taxpayer is anathema to the cardinal principles of due process.  Due process requires that a person be accorded an opportunity to be heard.  However, such opportunity would be put to waste if the reply or protest submitted to the BIR is not taken into account.  The BIR should consider the defenses raised and documents submitted by the taxpayer, and render a decision based on the submissions. Failure to adhere to these requirements constitutes a denial of due process and taints the administrative proceedings with invalidity.

As explained by the Court, indeed, the Commissioner is not obligated to accept the taxpayer’s explanations.  Nevertheless, when the protest is denied, the Commissioner must give reasons for doing so and must give the particular facts and law upon which the conclusion is based, which must appear on the record. As a consequence of such due process violation, the deficiency tax assessment was rendered void and cannot be enforced against the taxpayer.

The takeaway from these court decisions is that due process entails not only the opportunity to be heard but also the assurance of actually being heard and not merely be brushed aside. Apart from the taxpayer’s right to speak up and explain his side, now, the BIR is obliged to address the taxpayer’s arguments with reason, regardless of its denial or acceptance. Since tax collection is a form of exaction, no one should be denied his income or property without fair play.

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.


Charilyn R. Caliwag is a manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.