Taxwise Or Otherwise

As the main revenue-collecting agency, the Bureau of Internal Revenue (BIR) is tasked to collect a total of P2.039 trillion in tax revenue this year to fund the government’s “Build, Build, Build” program. It was able to surpass its first-quarter collection target by approximately 17%, collecting P422.587 billion above its target of P361.767 billion.
The implementation of the TRAIN Law may have largely contributed to the increased tax collection, but some credit may also go to the BIR’s intensified collection efforts through its stringent tax compliance programs.
One particular program that the Bureau has been aggressively using these past few years (and arguably the most feared by taxpayers) is “Oplan Kandado.” Introduced in 2009 through a Revenue Memorandum Order (RMO), Oplan Kandado aims not only to maximize the degree of voluntary compliance among taxpayers, but also to deter Tax Code violations.
True to the program’s moniker, it imposes heavy administrative sanctions on offenders, such as suspension and temporary closure of the taxpayer’s business. The RMO even provides that the operations be widely publicized in certain instances through press releases or conferences, and if possible, via televised coverage — a total nightmare for any taxpayer. The intention is for the program to create a lasting impact on the public, particularly erring taxpayers.
In February, a transport network vehicle service (TNVS) paid P41 million in taxes by way of reparations under Oplan Kandado. Just recently, more and more establishments, including a popular lechon restaurant in Quezon City, were shut down by the BIR due to alleged nonpayment of value-added tax (VAT). The clampdown may be due to the integration of the program as part of the BIR officials’ key performance indicators in 2017.
Oplan Kandado’s mandate is anchored on Section 115 of the Tax Code which gives the Commissioner of Internal Revenue (CIR) or his authorized representative the power to suspend business operations due to violations of any of the following essential VAT requirements: (1) Failure to register for VAT as required; (2) Failure to issue receipts or invoices; (3) Failure to file a VAT return and pay the tax due; and (4) Understatement of taxable sales or receipts by 30% or more.
Oplan Kandado starts with the issuance of a Mission Order from the BIR, authorizing revenue officers to conduct surveillance on a taxpayer’s operations, overtly or covertly, within a period of 10 to 30 days (unless extended in writing). In covert surveillance, the BIR officials may issue an Apprehension Slip on the spot if the taxpayer is caught in the act of not issuing official receipts/invoices, or issuing official receipts/invoices that are not registered with the BIR.
If after the conclusion of the surveillance the BIR finds basis for the closure of the business establishment, the taxpayer is sent a notice giving him the opportunity to explain “under oath” within 48 hours why the business should not be closed. If the taxpayer fails to respond within 48 hours or the BIR deems the explanations insufficient or unjustified, a five-day VAT Compliance Notice (VCN) shall be issued.
The taxpayer is given only two days to respond to the VCN. Upon receipt of the taxpayer’s response, the five-day VCN shall be deemed suspended and shall only resume upon receipt of the BIR’s reply/resolution finding the taxpayer liable.
Should the taxpayer refuse or neglect to submit an explanation within the prescribed two-day period, the BIR shall issue a Closure Order as approved by the CIR. To effect the Closure Order, the BIR will padlock the entrance and place a sign that the establishment is closed due to nonpayment of taxes or for other violations of the VAT rules and regulations. The closure of a business establishment shall be for a period of not less than five days and/or until the violation is rectified. In some cases, immediate or partial compliance may be considered sufficient basis to lift the closure.
The closure of an establishment, even if temporary, can result in significant financial and reputational repercussions, more so if the closure is publicized through mass media. Thus, many taxpayers choose to comply with the tax findings contained in the VCN rather than risk negative publicity that could mar their reputation.
Given the drastic measures employed by the program, how can taxpayers defend themselves when faced with Oplan Kandado findings? Consider the following steps:

1) Make sure that there is a valid Mission Order authorizing the revenue officers to conduct the surveillance.

2) Once a 48-hour notice is issued, ensure that the written reply is duly notarized and properly addressed the findings stated in the notice.

3) If a five-day VCN is issued, check if it contains the details of the findings of the investigating officer and if it states the particular provision of the Tax Code that was violated and for which rectification should be done.

4) Respond to the five-day VCN within two days from receipt, and/or comply with the terms of the VCN showing blatant violations (e.g. comply with the registration requirements in case of failure to register as VAT taxpayer).

Even under ideal conditions, both taxpayers and the BIR undeniably face difficulties with Oplan Kandado. While there are minor issues that can easily be resolved to prevent the closure of business establishments, in some cases, there are also complex issues that may require more than the allotted two-day period for compliance. For instance, what if the findings involved alleged nonpayment of VAT, while the taxpayer argues that it is not liable for VAT in the first place? Worse is if the taxpayer has already been slapped with a Closure Order while the issue remains the subject of a legal battle.
For many taxpayers, two days is too short a time to properly address tax findings and collate the supporting documents. Regrettably, some opt to just pay the deficiency tax assessments as an easy way out to avoid setbacks and other detrimental repercussions on their business operations. As a tax practitioner and a Filipino, I am pleased when the government meets (and exceeds) its revenue targets. However, I look forward to the day when such targets are achieved through voluntary payments by compliant taxpayers and through programs that are reasonably implemented to support the growing business community in the Philippines.
The views or opinions presented 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.
Kathrine Joy Capales is an Assistant Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
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