Everyone has a wish list. The Merriam-Webster Dictionary defines “wish list” as “a list of desired but often realistically unobtainable items.” I have my own long list of wishes for my family, my friends, and my work. Topping off my list are my wishes for my one-year-old daughter: I wish for her to grow up knowing and loving God, to be healthy and be able to live a happy life, regardless of whether she wants to be a certified public accountant or a tax practitioner like me, or a chef like her father. I think she prefers the latter since she likes to play with her kitchen play set. She only likes to scribble on my copy of the Tax Code, the Tax Reform for Acceleration and Inclusion (TRAIN) Law, and draft Revenue Regulations (RRs).
And so the list goes on for my other wishes on my personal life.
As for my tax practice, I have a long wish list. For now, I want to focus on my wishes for tax assessments. Wishes that either have been addressed by the recently passed TRAIN Law and recently issued RR No. 06-2018 or wishes that I hope our lawmakers can address in the succeeding packages of the administration’s tax reform program.
Let me start with a wish already granted. Beginning in the taxable year 2013, taxpayers have been heavily burdened in cases of failure to withhold or erroneous withholding. RR No. 12-2013 promulgated that no deduction will be allowed notwithstanding that the deficiency withholding tax is paid at the time of the audit. Thus, a taxpayer, though merely helping the government in collecting taxes by being its withholding agent, pays deficiency withholding tax and income tax, together with penalties, in case of failure to properly withhold. Let us be thankful that this rule is now revoked.
Pursuant to RR No. 6-2018, deduction from gross income shall be allowed, provided that the deficiency withholding tax is paid even at the time of audit or reinvestigation. Thus, a taxpayer shall no longer be burdened with additional deficiency income tax and corresponding penalties in case of failure to withhold. The taxpayer just has to settle the deficiency withholding tax and corresponding penalties, and the expenses shall be allowed as a deduction for income tax purposes.
Another wish granted relates to the penalty interests in case of failure to pay or remit on time the taxes due.
Prior to the TRAIN Law, every taxpayer who failed to pay their taxes on time was required to pay a deficiency interest of 20% per annum. A delinquency interest of the same rate may also be assessed in case of failure to pay the assessed deficiency tax, surcharge, and deficiency interest on time. Thus, a taxpayer may be in a situation wherein a total of 40% interest will be charged from the date of demand up to the date of payment. Let us be thankful again that these rules were now changed under the TRAIN Law.
Under the TRAIN Law, the deficiency or delinquency interest is now double the legal interest rate for loans as set by the Bangko Sentral ng Pilipinas (BSP). Currently, pursuant to BSP Circular No. 799, the legal rate of interest is at 6%. This makes the penalty interest rate now lower at 12% per annum. This is good for now. However, considering that the rate is now dependent on the legal interest rate set by BSP, this makes the penalty interest rate uncertain. In case the legal interest goes up to 12%, our penalty deficiency interest can go up to 24%, much higher than the 20% which we abhor. To lessen the uncertainty, I hope that this will just be pegged to the legal interest rate only, not double. The taxpayer already pays surcharge and compromise penalties in case of failure to pay taxes on time. Thus, at the most, they should only be required to pay for the cost of money not remitted to the government on time.
On the imposition of delinquency interest, the TRAIN Law now provides that the deficiency and the delinquency interest shall not be imposed simultaneously. Thus, a delinquent taxpayer shall only be required to pay delinquency interest in case of failure to pay on time the amount assessed in the final notice of demand by the Bureau of Internal Revenue (BIR).
While the above rules will certainly ease the burden of taxpayers in case of tax assessments, other items are still pending on my list and on every taxpayer’s wish list.
In every tax assessment, it is every taxpayer’s wish that it be closed as soon as possible. This is to avoid the running of penalty interest which, in certain cases, already exceeds the amount of basic deficiency tax. Thus, I also wish that there be a maximum period when the penalty deficiency interest shall be applied. Just as in the Local Government Code provisions, a period of three years may be set. Setting a maximum period on the imposition of penalty interest protects the taxpayer in case of prolonged tax assessments. With this, a taxpayer shall also no longer be in a position where they seek to settle their supposed deficiency tax based on BIR evaluation just to avoid the running of interest.
This leads me now to my fourth and last wish for tax assessment. I wish that our Tax Code will prohibit issuance of Final Assessment Notices (FAN) with findings exactly the same as those in the Preliminary Assessment Notices (PAN), except when the taxpayer failed to reply to the PAN or failed to properly address the findings in the reply.
Our Tax Code specifically requires the issuance of a PAN prior to the issuance of FAN. However, beginning 2013, RR No. 18-2013 removed the informal conference stage and authorized the BIR to issue the FAN within 15 days from receipt of the reply to PAN. Thus, it has been the practice of the BIR to disregard the taxpayer’s reply to PAN.
We understand the good intention of the BIR to expedite the processing of tax assessments. However, this only leads to an automatic issuance of Final Assessment Notice without considering the taxpayer’s reply to the PAN. The taxpayer is stripped of its right to respond and be heard prior to the issuance of FAN. This is fine in case the assessment is rightful and not based on the misappreciation of facts. In most cases, though, tax assessments are merely based on presumptions with no verification of facts. This puts the taxpayer in a situation of having a multi-million peso and sometimes even billion peso FAN, based alone on the appreciation of facts with no further verification from the taxpayer.
Giving the taxpayer the proper venue to reply and be properly heard of its reconciliation/explanations will certainly help both the taxpayer and the government to have a more effective and efficient tax assessment system. A taxpayer shall no longer be in a situation wherein it does not have any choice but to elevate the case to the Court of Tax Appeals or, worse, just settle it legally or “compromise” at the BIR level to close the tax assessment.
There are pending items in my wish lists that may or may not be granted. Thanks to our lawmakers if these are granted. If not, then let’s just hope that it will all be for the good of the taxpayers and this country. As for my wish for my daughter, I certainly hope that God will grant it, not exactly to be a tax practitioner, but to have a happy life.
Ma. Lourdes Politado-Aclan is a senior 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.