“The Golden Age of Infrastructure” is one of the key economic programs of the Duterte administration. To finance these massive infrastructure projects, the government has allocated P8.4 trillion, with taxes being the major funding source.
Since the execution of these projects will redound to the benefit of individuals, businesses, and foreign investors, we are expected to all do our fair share in making these projects possible. While taxpayers are required to make timely and correct payments on taxes due, the Bureau of Internal Revenue (BIR) for its part must respect the rights of the taxpayer, such as observing substantive and procedural due process during tax investigations.
Raising revenue through tax collection is generally done either voluntarily (i.e., the filing of self-assessed tax return and paying taxes) or involuntarily (i.e., payment based on findings as a result of tax investigation).
On the voluntary payment of taxes, the BIR recently issued Revenue Memorandum Circular (RMC) No. 60-2017 announcing the official launch of the Seal of Honesty (SOH) Certification Program. This program is spearheaded by the Center for Strategic Reforms of the Philippines, Inc. (CSR Philippines) in partnership with the BIR and the Department of Trade and Industry (DTI) with the aim of improving voluntary compliance by promoting a culture of honesty and integrity in paying taxes. Under this program, all taxpayers, both individuals (self-employed and professionals) and non-individuals, including estates, trusts and co-ownerships regardless of size and industry, may apply for an SOH Certification.
A duly certified SOH taxpayer shall be entitled to the following benefits: (a) issuance of annual tax clearance, without prejudice to the information not available at the time of issuance; (b) last priority tax audit; and (c) other privileges which DTI and other government agencies may also extend to certified honest taxpayers.
To enjoy these benefits, taxpayers should meet conditions and comply with a certain administrative process. As a prerequisite, taxpayers are required to: (a) settle all open tax cases and pending undisputed assessment per certification of the Revenue District Office; (b) observe full and honest compliance with all BIR regulations and requirements; (c) sign the Integrity Pledge to promote honesty and integrity in paying taxes; (d) not to bribe any personnel/official of the BIR; and (e) increase voluntary compliance by at least 20% in total tax payments for those who are regularly audited by the BIR based on their level of compliance.
However, the conditions and required process mentioned in Annex “A” of RMC No. 60-2017 are not too clear. Based on inquiry with the Office of the CSR, the evaluation process may take one year and there are documentary requirements (e.g., tax returns, audited financial statements, BIR Certificate of Registration) for the SOH certification. The Evaluation Committee under the office of the BIR Commissioner, and CSR Philippines are responsible for verifying full compliance with the SOH requirements. They will jointly endorse SOH applications to the BIR Commissioner for final approval. Further, it was clarified that a taxpayer may still qualify even if its voluntary compliance is less than 20% in total tax payments provided there is a justifiable reason to support its qualification for the program.
The SOH certification is valid for one (1) year and renewable annually subject to revalidation. This would not serve however as immunity from tax audit and collection if a taxpayer is found violating tax laws and regulations. For more guidance and clarity, an interested taxpayer should first coordinate with CSR officers responsible for this program (firstname.lastname@example.org or call (+63) 2 6227720) prior to filing of application.
Moving on to the tax investigation efforts of the BIR, it is also important that due process be observed so as not to trample upon the rights of the taxpayers.
Under the present process, a tax investigation involves two phases, i.e., first, the preliminary assessment and second, the final assessment. A tax investigation begins with the issuance of a Letter of Authority, followed by an examination of the taxpayer’s tax and accounting records. In the preliminary assessment phase, a taxpayer has 15 days to file a reply to the Preliminary Assessment Notice (PAN). If he/it fails to file a reply or after 15 days from submission of the reply, a Formal Letter of Demand/Final Assessment Notice (FLD/FAN) will be issued. At the FAN stage, the taxpayer must file a protest letter within thirty (30) days from receipt of notice and, if applicable, submit supporting documents within 60 days from submission of the protest letter. For failure to timely protest, the FLD/FAN shall become final and executory. If the protest is denied in whole or in part, or is not acted upon within 180 days from submission of documents, the taxpayer may elevate the case to the Court of Tax Appeals (CTA) within 30 days from receipt of the final decision denying the protest or from the lapse of the 180-day period.
In practice, there are instances however wherein the BIR failed to observe this process. In a recent decision of the Court of Tax Appeals En Banc, a tax assessment was canceled on the ground that the taxpayer’s right to due process was violated by the act of the BIR in issuing an FLD/FAN prior to the lapse of the 15-day period granted to the taxpayer to reply to the PAN (CTA EB No. 1389, dated 9 May 2017).
Moreover, the tenets of due process dictate that the FLD/FAN should be properly served by the BIR on the taxpayer concerned. The FLD/FAN is required to be served by personal delivery at the taxpayer’s known/registered address or wherever he may be found. If this cannot be done, the FLD/FAN shall be served by registered mail or substituted service. Under the rules on substituted service, the FLD/FAN shall be served as follows: (a) notice may be left at the registered address or known business address with his clerk or with a person having charge of it; (b) if known address is residence, notice may be left with a person of legal age residing therein; and (c) if no person is found in the taxpayer’s known address, the revenue officers concerned shall bring a barangay official and two disinterested witnesses to the address so that they may personally observe and attest to such absence. In scenario (c), the notice shall then be given to the witnessing barangay official. Such facts shall be stated at the bottom portion of the notice, as well as the names, official positions, and signatures of the witnesses. As mandated by the Supreme Court in several cases, these procedures are mandatory and non-compliance will render the assessment invalid.
In one CTA case, the court found that the BIR failed to properly serve the FLN/FAN to the taxpayer when the same was received by a security guard who has no authority to receive since he is not employee of the taxpayer. The fact that the taxpayer timely protested the FAN does not cure this defect of lack of due process (CTA Case No. 8745, dated 16 March 2017).
Tax collection should always be implemented within the bounds of the law. Increase in tax revenue to alleviate everyone’s way of living can be guaranteed through complete cooperation and transparency between and among taxpayers and BIR officials grounded upon honesty and integrity. So, let us do our share and the best that we can for our country.
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.
Sylvia B. Salvador is a director at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
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