As the adage goes, the only certainties in life are death and taxes. Taxes are also the lifeblood of government. The pivotal role of taxes cannot be emphasized enough as the nation focuses on recovering from the COVID-19 pandemic.
Yet, even as we concede the inevitability and indispensability of taxation, it is paramount in any democratic system that this power be wielded judiciously, respecting the rights of taxpayers. Due process is the cornerstone of many legal systems around the world, upholding the principles of justice, protection of individual rights, and the rule of law. No less than the 1987 Philippine Constitution provides that no person shall be deprived of life, liberty, or property without due process of law.
Due process becomes increasingly important in light of the state’s plenary power of taxation. In numerous decisions, the Supreme Court has reiterated that between the power of the state to tax and an individual’s right to due process, the scale favors the right of the taxpayer to due process.
Under Section 228 of the Tax Code, as amended, the Bureau of Internal Revenue (BIR) is required to inform taxpayers in writing of the law and facts on which the assessment is based. It is no surprise that most taxpayers feel a sense of unease and apprehension when faced with the prospect of a tax audit, driven by concerns about inconsistent rules during the tax assessment process and doubts about whether they will genuinely be heard at any stage of the process.
The BIR’s tax assessment process begins with the issuance of a Letter of Authority (LoA). Taxpayers must ensure that a valid LoA has been duly issued and received before the BIR can proceed with its tax assessment. If the BIR finds deficiency taxes during its examination, it shall issue a Notice of Discrepancy (ND). Should the taxpayer and the BIR fail to resolve the issues at the ND stage, a Preliminary Assessment Notice (PAN) will be issued, allowing the taxpayer to respond in writing within 15 days of receiving it.
Within an additional 15 days from the taxpayer’s response to the PAN, the BIR will issue a Final Assessment Notice along with a Formal Letter of Demand (FAN/FLD). The taxpayer is required to submit a protest letter within 30 days of receiving the FAN/FLD, which can take the form of either a request for reconsideration or a request for reinvestigation. In the case of a request for reinvestigation, additional supporting documents can be submitted within 60 days from the date of filing the protest. The BIR will then communicate its decision on the taxpayer’s protest through the issuance of a Final Decision on Disputed Assessment (FDDA).
In a minute resolution released by the Court in 2019, it was clarified that Section 228 of the Tax Code, as amended, gives the taxpayer 60 days to submit relevant supporting documents in a request for reinvestigation from the date of filing its protest to the PAN, and not the FAN/FLD. This pronouncement by the Court caused confusion among taxpayers as it is contrary to the BIR’s interpretation on when the 60-day period to submit additional documents must commence.
Because of this apparent contradiction, the Supreme Court corrected itself in G.R. No. 261065 dated July 10, and released it to the public on Oct. 4, 2023. In this case, the Court stated definitively that the reckoning point of the 60-day period for the submission of relevant supporting documents in a request for reinvestigation is from the filing of the administrative protest to the FAN/FLD, and not from the filing of the response or reply to the PAN.
In the same decision, the Court also ruled to cancel the deficiency taxes due to the BIR’s violation of the taxpayer’s right to due process. In this case, the BIR issued the FDDA after 30 days from the taxpayer’s filing of the protest and before the lapse of the 60-day period for the taxpayer to submit additional supporting documents in its request for reinvestigation.
The BIR contended that the taxpayer was not actually deprived of due process, arguing that the essence of due process in administrative proceedings is merely the opportunity to be heard, and the taxpayer was given such an opportunity when it was able to file its protest to the FAN/FLD. In rejecting the BIR’s argument, the Court explained that the taxpayer “was denied even the opportunity to present its evidence as would afford it a genuine opportunity to be heard, despite the clear procedural rules giving it a 60-day period within which to provide relevant supporting documents pursuant to its request for reinvestigation.”
In another case (G.R. Nos. 201398-99. October 3, 2018), the Court also ruled that while the BIR is not compelled to accept the taxpayer’s explanations, it must provide a justification for dismissing the same. The BIR is obliged to give the particular facts upon which its conclusions are based, and those facts must appear in the record.
These court decisions underscore the importance of due process, not just in providing a mere opportunity for taxpayers to be heard but in ensuring a genuine opportunity. Taxpayers must be provided with ample time, as permitted by law, to present their evidence, and they should be assured that their submitted documents will be considered and addressed by tax authorities with reason before arriving at a final decision, be it the acceptance or denial of the taxpayer’s claim. The right to present evidence is rendered meaningless if tax authorities can arbitrarily disregard it without a valid explanation.
Balancing the rights of taxpayers and the government’s need to collect taxes is essential for promoting transparency within the tax system. In the context of tax audits and assessments, it is important to uphold the principles of fairness and equity, as these processes affect the proprietary rights of specific persons. It is also crucial to emphasize that when taxes are due, they should rightfully be paid to the government.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Carlo Angelo T. Negado is a senior associate of the Tax Advisory & Compliance Practice Area of P&A Grant Thornton at Cebu Office. P&A Grant Thornton is one of the leading audits, tax, advisory, and outsourcing firms in the Philippines, with 29 Partners and more than 1000 staff members.
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