All things come to an end. The question is: when? As for everything else, we also seek closure in tax assessments. The decision to end the tax assessment sooner or later depends on us.
A taxpayer subject to a tax assessment may exhaust all efforts to answer the Bureau of Internal Revenue (BIR)’s allegations. These include the timely filing of a reply to the Preliminary Assessment Notice (PAN) and the request to reinvestigate or reconsider the Final Assessment Notice (FAN). At this stage, the BIR has to decide.
According to the National Internal Revenue Code of 1997 (Tax Code), as amended, after filing an administrative protest (i.e., a request for reinvestigation or reconsideration) to the FAN, the BIR may deny such a protest in whole or in part. The decision of the BIR is embodied in a Final Decision on Disputed Assessment (FDDA).
An FDDA can either close a burdensome tax audit or start another complex legal journey. If a taxpayer receives an FDDA, he needs to decide which path to take. The taxpayer may either end the assessment by paying; or he may choose a longer route by requesting a reconsideration from the Commissioner of Internal Revenue (CIR) or by filing a petition for review before the Court of Tax Appeals (CTA).
If the taxpayer chooses to pay the amount stated in the FDDA, he must do so within the period stated in the FDDA using Payment Form No. 0605. After paying the amount, he needs to transmit a copy of the payment form and the proof of payment to the signatory of the FDDA (usually the Regional Director or the Large Taxpayers Services Assistant Commissioner). He also needs to send copies of the documents to the assessment and collection divisions of the Revenue Region and the revenue district where the taxpayer is registered or assessed. Under Revenue Memorandum Order No. 33-2018, the BIR is required to issue an Authority to Cancel Assessment (ATCA) as proof of cancellation of the tax assessment.
If the taxpayer chooses to protest the FDDA, however, he may do so administratively or judicially. As provided under Revenue Regulations (RR) No. 18-2013, if the protest or administrative appeal is denied in whole or in part by the CIR, (i) the taxpayer may appeal to the CTA within 30 days from receiving the said decision; or (ii) elevate his protest through a request for reconsideration to the Commissioner within 30 days of the decision. Otherwise, the tax deficiency shall be final, executory, and demandable. Note that the remedies discussed are mutually exclusive.
In a request for reconsideration, the taxpayer hopes that the CIR will overturn his own or his authorized representative’s decision. The taxpayer must consider that a request for reconsideration is indirectly telling the BIR that it failed to fully consider all the circumstances of the case or that the BIR committed an error. Although a request for reconsideration will allow the BIR to rectify its mistakes, there are cases when the BIR will insist on its position and to deny the request for reconsideration. If this happens, the assessment could drag on for a bit longer and that the taxpayer’s only remedy will be the Courts.
In anticipation of the issuance of an FDDA, the company should also consider preparing to go to court if an unfavorable decision is issued by the CIR. The option to appeal the case to the CTA is open after receiving the FDDA or upon denial of the request for reconsideration before the CIR. In this case, the taxpayer should consider the following key decision points:
* Filing before the CTA has certain costs, such as filing fees, lawyer’s fees, hiring of an independent certified public accountant, and other incidental fees. It is, therefore, important that the cost-benefit of seeking judicial relief is one of the basic considerations.
* Seeking judicial relief takes a long time. If the taxpayer does not get a favorable judgment, he will still pay the interest on the tax that accumulated while the case was pending;
* Consider the legal and factual strength of the taxpayer’s case. The taxpayer must have a good legal basis before deciding to go to the CTA. An equally important aspect in going to the CTA is that the taxpayer must be able to support his legal arguments. Supporting documents must address all points in substance and form.
* The case may involve gray areas of the law, which will result in recurring exposure for the taxpayer. As the final arbiter of a tax controversy, the Court (CTA and Supreme Court) can shed light on unclear interpretations of the law, particularly when the BIR’s interpretation is not equitable and fair to the taxpayer.
Under RR No. 18-2013, the failure of the taxpayer to administratively or judicially elevate his protest to the FDDA will open up a remedy for the government — to collect the tax. Section 205 provides for civil remedies for collecting delinquent taxes; Section 207 provides for several summary remedies, such as the distraint of the personal property and the levy of the taxpayer’s real property.
If the amount is fully paid, pursuing a request for reconsideration or filing a case with the CTA are not viable options under the taxpayer’s current circumstances. The taxpayer may pursue a compromise settlement, abatement, or cancellation of tax liability.
Section 204(A) of the Tax Code provides that the CIR may compromise on the payment of internal revenue tax on grounds such as doubtful validity of assessment or when the taxpayer shows financial incapacity to pay the assessed tax. Section 204(B) of the Tax Code also provides that the CIR may abate or cancel a tax liability when (1) the tax or any portion thereof appears to be unjustly or excessively assessed; or (2) the administration and collection costs involved do not justify the collection of the amount due.
However, the CIR has the sole discretion to grant the offer of compromise settlement or abatement of taxes. The CIR’s denial of these remedies is not subject to judicial review. Also, interest on the tax deficiency continues to run while the application for compromise settlement or abatement is pending, and should be paid if the application is denied.
The choice of how to end the tax assessment is primarily with the taxpayer. There are shorter routes and there are longer routes. Some routes may be costlier than others. Whatever the action taken after receiving the FDDA, taxpayers must carefully weigh their options based not only monetary considerations, but on principles of equity as well.
Eliezer P. Ambatali is a manager of the Tax Advisory and Compliance of P&A Grant Thornton. P&A Grant Thornton is one of the leading audit, tax, advisory, and outsourcing services firms in the Philippines.