Due process is an obligation of the state to respect all the legal rights owed to a person. This balances the power of law of the land and protects the individual person from it. In law, due process contemplates notice and opportunity to be heard before judgment is rendered.
Applying the principle of due process to my four-year-old daughter’s iPad usage, I, as her mother, with parental rights over her, cannot simply tell her that I want her to stop using it without hearing her side. She might say she owns the iPad, which gives her the right to use it. Informing her of the limits to the device’s usage constitutes due process, opening the path to a resolution of the issue — ultimately, that she can no longer use it.
The same is true for the Bureau of Internal Revenue (BIR) tax assessments. Due process is enshrined in our Tax Code.
Under Section 228 of the Tax Code, when the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he must first notify the taxpayer of his findings.
Specifically, the tax assessment regulations (i.e. Revenue Regulations No. 12-99, as amended by RR No. 18-2013 and RR No. 07-2018) previously required the issuance of a Notice of Informal Conference (NIC) which provides the taxpayer the opportunity to present and explain his side on the initial findings of the BIR.
In addition, under RR No. 07-2018 which reinstated the issuance of NIC, the Revenue Officer who audited the taxpayer’s records must state in his report whether or not the taxpayer agrees with his findings that the taxpayer is liable for deficiency taxes. If the taxpayer is not amenable, based on the officer’s submitted report of investigation, the taxpayer needs to be informed, in writing through the issuance of the NIC, of the discrepancies in the taxpayer’s payment of his internal revenue taxes.
Based on the provisions of RR No. 07-2018, the taxpayer can still discuss with the revenue officer the initial findings before the issuance of the NIC. Because of this discussion, there are occasions when many findings can easily be explained by the taxpayer.
However, the BIR thinks that the NIC process drags out the assessment process for too long and that the NIC actually contains BIR’s initial discrepancies noted. Thus, the BIR updated the NIC issuance rules in RR No. 22-2020.
Under RR No. 22-2020, a Notice of Discrepancy (ND), instead of an NIC, must be issued to the taxpayer if he is found liable for deficiency taxes during an investigation conducted by a revenue office. It seems that the discussions of initial findings prior to the issuance of an ND are now strictly not allowed. Discussions on the BIR’s initial findings will only happen after the issuance of the ND.
Based on the prescribed template for the ND, the taxpayer must be able to present and explain his side on the discrepancies noted by the BIR within five days from receipt of the ND. In case the taxpayer needs more time to present documents, he may submit such documents and explanations after the discussion but within 30 days from receipt of the ND. There can be no further discussion of discrepancies beyond 30 days from the receipt of the ND.
Also, the new issuance now explicitly provides that all documents supporting the taxpayer’s explanation must be submitted within the 30-day period.
Moreover, within 10 days from the conclusion of the discussion, the investigating officer must also endorse the case for review and approval for issuance of a Preliminary Assessment Notice (PAN) if the taxpayer is still found to be liable for deficiency taxes.
We understand the BIR’s need to expedite the assessment process which is beneficial also to the taxpayer for the early closure of tax assessment cases. However, since the Philippines is still under a state of emergency due to the COVID-19 pandemic and the resulting lockdowns, the initial five-day period, not to be extended beyond 30 days, may be too short for the taxpayer to prepare and retrieve supporting documents given the limited manpower available for companies working with minimal staffing.
Taxpayers are appealing for the BIR to allow extensions to the 30-day period before it proceeds to endorse the case for the issuance of a PAN. We also hope that the BIR has fully evaluated the taxpayer’s records prior to the issuance of the ND so that the notice will only include the real and actual possible tax exposure of the taxpayer. Otherwise, the initial five-day period to present, not to extend beyond 30 days, will really be too short for the taxpayers to comply.
The taxpayer may also opt to conduct a tax compliance review to determine the procedures and practices that may lead to potential tax liabilities; quantify tax exposure, risks, and penalties; and eventually, determine the proper course of action and alternative tax-efficient policies and procedures which will help address potential tax findings in case of BIR audit. As the saying goes, we should be ready with our umbrella before the rain. Given the stricter implementation of due process, arguments and supporting documents must be ready before a potential tax assessment.
As for my daughter’s iPad usage, due process helped her understand that limiting her screen time is actually for her benefit. This example only reinforces the need to be ready with credible arguments in case future issues arise.
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.
Ma. Lourdes Politado-Aclan is a director from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.