Notes On Taxation Remedies.doc

TAX REMEDIES UNDER NIRC I.

Assessment of Internal Revenue Taxes A. Definition/nature/effect/basis 1. Meaning of tax assessment – It is the official action of an officer authorized by law in ascertaining the amount of tax due under the law from a taxpayer. This action necessarily involves: a. the computation of the sum due; b. giving notice to that effect to the taxpayer; and c. the making, simultaneously with or sometime after the giving of notice, of a demand upon him for the payment of the tax deficiency stated. 2. Tax audit – is the process of examining, going over, or scrutinizing the books and records of the taxpayer to ascertain the correctness of the tax declared and paid by the taxpayer. It can only be performed upon a Letter of Authority issued by the Commissioner or Regional Director. 3. Letter of Authority – is a commission granting a revenue officer assigned to perform assessment functions the power to conduct an examination of the books and records of a taxpayer within the jurisdiction of the district in order to collect the correct amount of tax, or to recommend the assessment of any deficiency tax due. 4. Pre-assessment notice - is a written notice given to a taxpayer informing him of the findings of the BIR officer/s relating to a deficiency in his tax return, indicating therein the law and the facts on which the assessment is made and requiring the taxpayer to respond within a given period, otherwise, the Commissioner or his duly authorized representative shall issue an assessment based on his findings. Instances where pre-assessment notice NOT required: a. when the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return; b. when the discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; c. when a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; d. when the excise tax due on excisable articles has not been paid; e. when an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machinery and spare parts, has been sold, traded or transferred to non-exempt persons. 5. Notice of assessment – a notice given to the taxpayer by the BIR informing him of the amount of deficiency tax for which the taxpayer is being assessed based on the findings of the BIR upon failure of the taxpayer to respond to the preassessment notice or after an examination has been conducted. 6. Deficiency – the amount by which the tax properly due exceeds the sum of the amount of the tax shown on a taxpayer’s return plus amounts previously assessed or collected as deficiency, less any credits, refunds, or other payments due the taxpayer; the amount a taxpayer is deficient in his tax payments.

Delinquency – The state of a person upon whom the personal obligation to pay the tax has been fixed by lawful assessment and thereafter fails to pay the tax within the time limited by law. 7. Jeopardy assessment – an assessment made demanding immediate payment of the tax due without the usual formalities in instances when the Commissioner believes that if the tax will be collected under normal procedures, the collection of such tax is at risk which might result in loss to the government. Instances when jeopardy assessment may be issued: When it shall come to the knowledge of the Commissioner that a taxpayer is: a. retiring from business subject to tax; or b. intending i. to leave the Philippines or remove his property therefrom; or ii. to hide or conceal his property; c. performing any act tending i. to obstruct the proceedings for the collection of the tax for the past or current quarter or year; or ii. to render the same totally or partly ineffective unless such proceedings are begun immediately. (Sec. 6D, R.A. 8424) 8. Power of the Commissioner to assess deficiency tax based on best evidence obtainable – Sec. 6B of R.A. 8424 empowers the Commissioner to assess the proper tax and make or amend the return based on the best evidence obtainable (from his own knowledge and from such information as he can obtain through testimony or otherwise) when: a. a report required by law as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by laws or rules and regulations; or b. there is reason to believe that any such report is i. false ii. incomplete iii. erroneous. The return made by the Commissioner, in this instance, shall be prima facie correct and sufficient for all legal purposes. 9. Requisites of a valid assessment a. post-reporting notice or notice for an informal conference after the tax audit b. Pre-assessment notice, if required c. Issuance and receipt of Notice of Assessment i. must be issued prior to lapse of prescriptive period ii. the written notice must state the facts and the law upon which the assessment is based

Sec. 4. – Power of Commissioner to Interpret Tax Laws and Decide Tax Cases Power to interpret provisions of NIRC and other tax laws – exclusive and original jurisdiction of CIR; review by Sec. of Finance. Commissioner has power to decide disputed assessments

refunds of internal revenue taxes fees or other charges penalties imposed in relation thereto other matters arising under the NIRC or other laws administered by BIR Exclusive appellate jurisdiction of the CTA.

Interpretation of tax laws Deciding tax cases

Exclusive and Original Jurisdiction CIR CIR

Review/Appeal Sec. of Finance (review) Exclusive Appellate Jurisdiction of CTA

Sec. 5. – Power of Commissioner to Obtain Information, and to Summon, Examine, and Take Testimony of Persons To carry out CIR’s function of: Ascertaining correctness of any return Making a return where none has been made Determining the liability of any person for any revenue tax Collecting tax liabilities Evaluating tax compliance Commissioner is empowered: 1. to examine books, paper, records and other data 2. to obtain any information such as a. costs and volume of production b. receipts or sales and gross incomes of taxpayers c. names, addresses, and financial statements of i. corporations ii mutual fund companies iii. insurance companies iv. regional operating headquarters of MNCs v. joint accounts vi. associations vii. joint ventures or consortia viii. partnerships Information may be obtained from Any person other than the taxpayer Any office or officer of national and local governments government agencies and instrumentalities including BSP GOCCs 3. to summon the person liable for tax or required to file the return any person having possession books of accounts of the person custody of the other accounting records liable for tax care any other person to appear before the Commissioner or his duly authorized representative to produce such books, papers, records or other data, and to give testimony 4. to take testimony of persons concerned

5. to cause revenue officers and employees to make a canvass of any revenue district or region and inquire after and concerning all persons therein who may be liable to pay any internal revenue tax all persons owning or having the care, management or possession of any object with respect to which a tax is imposed. However, the Commissioner’s authority to inquire into bank deposits shall be limited to: Bank deposits of a decedent to determine his/her gross estate Bank deposits of a taxpayer who has filed an application for compromise of his tax liability by reason of financial incapacity Waiver in writing of taxpayer’s privilege under Bank Secrecy Law Required when applying for compromise of tax liability by reason of financial incapacity; such waiver constitutes the Commissioner’s authority to inquire into bank deposits of the taxpayer. Sec. 6. Power of Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and Enforcement A. Examination of returns and determination of tax due - Tax returns filed by taxpayers as basis for examination - When no tax return has been filed, examination may proceed based on other data obtained by Commissioner - Tax or deficiency tax assessed payable upon notice and demand from Commissioner or duly authorized representative - Tax return, statement or declaration once filed cannot be withdrawn - may only be modified, changed or amended within three years from filing before any notice for audit or investigation has been actually served the taxpayer B. Failure to submit required returns, statements, reports and other documents - empowers the Commissioner to assess the proper tax based on the best evidence obtainable - Commissioner shall make or amend the return from his own knowledge and from such information as he can obtain through testimony or otherwise; such information deemed prima facie correct and sufficient for all legal purposes. conditions: - when a report required to be filed is not forthcoming within the time fixed by law. - when there is reason to believe that any such report is false, incomplete or erroneous. C. Authority to conduct inventory-raking, surveillance and to prescribe presumptive gross sales and receipts - when there is reason to believe that a taxpayer is not declaring his correct income, sales or receipts for income tax purposes, the Commissioner may - order inventory-taking of goods of goods (to be used as basis for determining taxpayer’s internal revenue liabilities) - place the business operations of the taxpayer under observation or surveillance - findings shall be used as basis for assessing the taxes for the other months or quarters of the same or different taxable years. - when there is failure to issue receipts and invoices or when there is reason to believe that the books of accounts or other records do not correctly reflect the declarations made in tax returns, Commissioner may prescribe a minimum amount of such gross receipts, sales and taxable base based on the sales, receipts, income or other taxable

base of other persons engaged in similar businesses under similar situations or circumstances D. Authority to terminate taxable period - Commissioner shall declare the tax period of any taxpayer terminated at any time when it shall come to the knowledge of the Commissioner that a taxpayer - is retiring from business subject to tax - is intending to leave the Philippines or to remove his property therefrom or to hide or conceal his property - is performing any act tending - to obstruct the proceedings for the collection of the tax for the past or current quarter or year or - to render the same totally or partly ineffective unless such proceedings are begun immediately - Commissioner shall send the taxpayer: - notice of such decision - request for the immediate payment of the tax for the period so declared terminated and the tax for the preceding year or quarter or such portion thereof as may be unpaid - taxes due and payable immediately - taxes subject to all the penalties and surcharges prescribed unless paid within the time fixed in the demand made by Commissioner. E. Authority of Commissioner to prescribe real property values - Commissioner authorized to divide the Philippines into different zones and assign valuation of real properties in the different zones - Value of property for computing any internal revenue tax: whichever is HIGHER between FMV as determined by Commissioner and FMV as shown in the schedule of values of the Provincial and City Assessors F.

Authority of Commissioner to inquire into bank deposit accounts - Commissioner is authorized to inquire into bank deposits of: - a decedent to determine his gross estate - any taxpayer who has filed an application for compromise of his tax liability by reason of financial incapacity - taxpayer must execute in writing a waiver of his right under Bank Secrecy Law and other special laws, such waiver serving as the Commissioner’s authority to inquire into his bank deposits - application for tax compromise shall not be considered without this written waiver

G. Authority to accredit and register tax agents - Commissioner shall accredit and register individuals and general professional partnerships and their representatives who prepare and file tax returns, statements, reports, protests, and other papers with, or who appear before the BIR for and in behalf of taxpayers - Creation of National and Regional Accreditation Boards - Those whose application for accreditation is denied by the Commissioner of the National or Regional Accreditation Boards may appeal to the Secretary of Finance - Secretary of Finance to act on appeal within 60 days from receipt of such appeal

-

Failure of Sec. of Finance to act on appeal deemed approval of the application for accreditation of the appellant.

H. Authority of Commissioner to prescribe additional procedural or documentary requirements - Commissioner may prescribe the manner of compliance with any documentary or procedural requirement in connection with the submission or preparation of financial statements accompanying the tax returns. Sec. 203 NIRC Sec. 222-223 NIRC Sec. 228 NIRC Rev. Reg. 12-85 Procedure covering administrative protest on assessment by the BIR Commissioner Rev. Reg. 7-93 Filing of quarterly income tax returns and payment of quarterly income tax by individuals receiving self-employed income Sec. 222 (e) NIRC re: Inquiry into any return filed in accordance with the provisions of any tax amnesty law or decree as amended by BP 700 Rep. V. IAC, 196 SCRA 335 Bonifacio Sy Po v. CTA, 164 SCRA 524 Meralco v. Savellano, 117 SCRA 804 Elegado v. CTA, 173 SCRA 285 Commissioner v. Island Garment, 153 SCRA 665 Collector v. Benipayo, 4 SCRA 182 Commissioner v. Construction Resources, 145 SCRA 671 Marcos v. CA, G.R. 120880, 5 June 1997 B.

Period to assess deficiency tax 1. prescription: 3 years 10 years 2. Suspension of prescriptive period/Exceptions Sec. 203 NIRC of 1997 Secs. 222-23 NIRC of 1997

Read: Rev. Memo Order 20-90 (4 April 1990) – Proper execution of the waiver of the statute of limitations under the NIRC Rev. Memo Order 48-90 (23 April 1990) Counting of the three-year prescriptive period in issuance of notice of assessment, or warrants of distraint, levy and garnishment Cases: CIR v. CTA, 195 SCRA 444 Commissioner v. Gonzales, 18 SCRA 757 Re: prescriptive period to assess Republic v. Kerr, 18 SCRA 20 Aznar v. CTA, 58 SCRA 519 Optional:

Basa v. Republic, 138 SCRA 34

Republic v. Dela Rama, id. II.

Protesting an assessment/Remedy before payment A.

How to protest or dispute an assessment administratively

Sec. 228 NIRC of 1997 1. Effect of protest/assessment deemed DISPUTED 2. Suspension of the prescriptive period to collect 3. Two ways of protesting administratively a. Request for reconsideration b. Request for reinvestigation Rev. Reg. 12-85 Procedure covering administrative protest on assessment by BIR Commissioner 4. Differences and similarities of protest cases under the Tariff and Customs Code 5. Payment under protest not required under the NIRC 6. 60-day period to submit relevant documents B. Effect of failure to protest Sec. 228 NIRC of 1997 Marcos v. CA, G.R. No. 120880, 5 June 1997 Mambulao Lumber Co. v. Rep., 132 SCRA 1 Dayrit v. Cruz, 165 SCRA 571 Re: Effect of abandoning the protest Com. V. Wyeth Suaco, 202 SCRA 125 C.

Commissioner renders a decision on the disputed assessment 1. Remedy of the taxpayer if protest is denied: Appeal to the CTA the final decision of the CIR on the disputed assessment. 2. Remedy of the taxpayer if the CIR fails to act on the protest within 180 days from receipt of protest. 3. Effect of failure to appeal 4. What is the final decision of the CIR on the disputed assessment? Rev. Reg. 12-85 Sections 4 / 228 NIRC of 1997 Section 228 NIRC of 1997 Mambulao Lumber v. Republic, id. / civil action to enforce judgment Commissioner v. island Garment, id. Dayrit v. Cruz, id. Commissioner v. Union Shipping, 185 SCRA 547 Commissioner v. Algue, 158 SCRA 9 Advertising Asso. V. CA, 133 SCRA 765

Optional:

III.

Surigao Electric v. CTA 57 SCRA 523 Fabular v. CA, 119 SCRA 329 St. Stephen School v. Collector, 104 Phil. 314

Claims for refund and credit taxes/Remedy AFTER payment A.

When/How to file claim/prescriptive period

Who may file for refund? Taxpayer/withholding agent Refund without claim Payment under protest not a requirement Sec. 204 (3) NIRC as amended by RA 8424 Re: 10% and 40% limit re: compromise amount Requisites if beyond the limit OR the basic tax is greater than P1M Sec. 229 NIRC of 1997 CIR v. Philamlife, G.R. 105208, 29 May 1995 CIR v. Tokyo Shipping, G.R. 68252, 25 May 1995 San Carlos v. CIR, 228 SCRA 135 Note: Section 204 as amended by RA 8424: A return filed showing an overpayment shall be considered as a written claim for credit or refund. CIR v. CA and Citytrust, 234 SCRA 348 B.

Judicial remedy of the taxpayer 1.

2.

Appeal to the Court of Tax Appeals a. If CIR denies the claim or request 30 days from receipt of decision b. If CIR fails to act on the protest within 180 days / 30 days to be counted from lapse of the 180-day period. Appeal by filing a petition for Review / Petition for Refund a. Within two years from date of payment to initiate judicial proceedings Section 4 NIRC of 1997 Section 229 NIRC b. Meaning of supervening causes c. 30-day period to appeal jurisdictional d. The 2-year period to initiate judicial proceedings not jurisdictional but a positive requirement e. The two periods (30 days and 2 years) MUST concur CIR v. Philamlife, G.R. No. 195208, 29 May 1995 CIR v. CA and Atlas Consolidated, 232 SCRA 321 Collector v. Prieto, 2 SCRA 1007 CIR v. Palanca, 18 SCRA 496 Maceda v. Macaraig, 223 SCRA 217 Commissioner v. TMX Sales, 205 SCRA 184 Gibbs v. Com., 15 SCRA 318 Gibbs v. Com., 107 Phil. 232 When Gibbs contributed to the withholding tax system, he did not really deposit an amount to the Commissioner of Internal Revenue but actually performed and extinguished his tax obligation for the year concerned. He paid his tax liabilities for that year. A taxpayer whose income is withheld at the source will be considered to have paid his tax liability when the same falls due at the end of the year. It is from this date, or when the tax liability falls due, that the twoyear prescriptive period starts to run with respect to payments effected through the withholding tax system. Com. V. Concepcion, 22 SCRA 1058

Concepcion already requested for refund of estate and inheritance taxes at the BIR. His request denied, he appealed to the CTA but was dismissed for having been filed beyond the reglementary period. After paying under protest, he sued again, this time for recovery. The Court said he can’t do this because the remedy of contesting the validity of an assessment cannot be revived when there is already a final prior judgment dismissing the same on the ground of prescription. Com. V. Procter and Gamble, 204 SCRA 957 The BIR appealed a CTA decision granting to P & G Philippines. For the first time on appeal, however, it raised the issue of P & G Philippines not being the proper party to claim refund. It said that P & G USA instead should make the claim. The Court said BIR should not be allowed to do this because it had all the opportunity to ask about P & G’s capacity or authorization from its parent company at the administrative level. It is unfair and too late to ask for it now especially because this suit was filed just before the expiration of the two-year prescriptive period. ACCRA Investment vs. CA The Court elaborates on the (second) Gibbs ruling, saying that there are two alternative reckoning dates for a taxpayer whose income is withheld at source: (1) the end of the tax year, and (2) when the tax liability falls due. In this case, since ACCRA Investments only knew its tax liability on April 15, 1982, when it filed its return, this date would be the reckoning date for the prescriptive period and not December 31, 1981, when the taxes withheld at source were paid and remitted to the BIR. Before it filed its return, ACCRA was not sure of whether it made a profit or not. Cebu Portland v. Collector, id. Aguilar v. CA, 190 SCRA 1990 IV.

Jurisdiction of the Court of Tax Appeals A. B. C. D. E.

RA 1125 – the law creating the CTA Why was the CTA created? Phil. Refining Co. v. CA, 256 SCRA 661 Optional: Ursal v. CTA, 101 Phil. 209 Jurisdiction of the CTA FINAL decisions of the Commissioner of Internal Revenue on DISPUTED assessment Meaning of disputed assessment Who may appeal to the CTA? Sec. 11 RA 1125 Sec. 7 RA 1125 as amended by RA 3457

Limitations:

New issues cannot be raised for the first time on appeal. What are the exceptions?

CIR v. PG-PMC, 204 SCRA 377 Sec. 218 NIRC

Lim v. CTA, 105 Phil. 974 Com. v. Villa, 22 SCRA 4 Com. v. Joseph, 5 SCRA 895 Meralco Securities v. Savellano, id. V.

Appeal from the CTA to the Court of Appeals, from the CA to the Supreme Court Prescriptive period Magsaysay Lines v. CA, G.R. No. 111184, 12 August 1996 Liboro v. CA, 173 SCRA 285 Supreme Court Circular 1-91 as amended by Supreme Court Revised Administrative Circular 1-95

VI.

Collection of Internal Revenue Taxes A.

Prescriptive period to collect 1. Section 203 – 3 years 2. Section 222 – 5 years

Com. v. Wyett Suaco, 202 SCRA 125 Rev. Reg. 12-93 as amended by Rev. Reg. 3-94 Rev. Reg. 14-93 as amended by Rev. Reg. 3-94 Re: Tax payment by checks and by bank debit memo VII.

Remedies Available to the Government A.

Administrative remedies/Summary remedies Secs. 203-231 NIRC Commissioner v. Wyett Suaco, 202 SCRA 125 1. Distraint of personal property Definition/kind/procedure Secs. 206-212 NIRC Secs. 221-222 NIRC Rev. Reg. 3-69 2. Levy of Real property Definition/procedure Secs. 213-218 NIRC Rev. Reg. 3-69 Marcos v. CA, id. 3. Forfeiture Sec. 216 NIRC Secs. 224-226 NIRC 4. Tax lien Sec. 219 NIRC of 1997 Rev. Memo Circular 2-94 Republic v. Enriquez, 166 SCRA 608 Commissioner v. NLRC, 238 SCRA 42

Hongkong and Shanghai Bank v. Rafferty, 39 SCRA 145 5. No injunction to restrain collection of taxes Sec. 218 NIRC Review: Northern Lines v. CTA, 163 SCRA 25 Exception: CTA Sec. 11 RA 1125 Conditions for the issuance of injunction B.

Judicial remedies Civil/criminal action Requirements in filing criminal/civil cases Secs. 220-221 NIRC Ungab v. Cusi, 97 SCRA 877 Com. v. CA, 257 SCRA 200 (Lucio Tan/Fortune Tobacco Case) Resolution on the Motion for Reconsideration, 7 February 1997

VIII.

Statutory Offenses and Penalties A.

Civil Penalties/Surcharges/Interest Sec. 248-251 NIRC of 1997 1. Applicable interest rate 20 % / Manila Reference Rate : Whichever is higher 2. Computation of interest/basis Rev. Reg. 3-91 (1-24-91) – Implementing Sec. 294 of the NIRC/Prescribing a deficiency rate of interest higher than 20% per annum 3. Surcharge – 25% 50% a. False return v. fraudulent return b. Fraud assessment c. Mandatory imposition of penalties Cases:

B.

Javier v. Com., 199 SCRA 824 Aznar v. Collector, 58 SCRA 519 Castro v. Collector, 6 SCRA 886 Issuance/printing of receipts, registration of name/violations/penalties Secs. 236-243 NIRC Sec. 263 NIRC

C.

Compliance requirements 1. Keeping of books of accounts 2. Securing tax identification number (TIN) 3. Attachments to tax returns: Certificate of tax compliance Rev. Reg. 3-90 Secs. 232-236 NIRC Rev. Reg. 11-89 Registration of books of accounts

Rev. Memo Circular 13-82 Procedures in the issuance of permits to use loose leaf books of accounts, records, invoices and receipts Rev. Reg. 13-93 Re: Issuance and use of TIN Rev. Memo Circular No. 63-91 Issuance of the New TIN (Tax Identification Number) to taxpayers and its use on documents and receipts D.

Crimes/offenses/penalties/forfeitures 1. Revised penalties Secs. 224-228 NIRC as amended by RA 7642 Rev. Reg. 4-94 Sec. 255 as amended by RA 7497 Secs. 253-281 NIRC a. Elements of tax evasion b. Persons liable in case taxpayer is a juridical entity c. Payment of tax NOT a valid defense 2. Prescription of violations of the NIRC Rev. Memo Circular 101-90 dated 26 Nov. 1990 – Determination of when cause of action for wilfull failure to pay deficiency tax accrue and prescription under Sec. 281 NIRC Lim v. CA 190 SCRA 616 Ungab v. Cusi, 97 SCRA 877 People v. Tierra, 12 SCRA 666 Aznar v. CTA, 58 SCRA 519 Com. v. JAL, 202 SCRA 450

IX.

Abatement of tax / Tax Compromise Section 204 NIRC of 1997 A.

Authority of the Commissioner to abate taxes 1. 2.

Grounds for abating taxes and penalties Conditions

Read: RMO 45-93 as amended by RMO 54-93 B.

Power to compromise / discretionary power 1. Grounds/reasons for a compromise agreement 2. Cases that cannot be compromise 3. Subject to limitations a. If reason is financial incapacity NOT less than 10% of basic tax b. Other cases not less than 40% of basic tax c. Would require approval of the Board: i. Basic tax assessment P1M ii. Or below the prescribed limits 4. Government’s remedy if taxpayer fails to comply with the agreement Sec. 204 NIRC of 1997

Rev. Reg. 12-93 Implementing Guideline for RA 7646 Rev. Memo Order 45-93 as amended by RMO 54-93 Example: abatement of penalties Rev. Memo Order 32-92 as amended by RMO 22-94 Rev. Memo Order 1-90 as amended by RMC 17-90 Example schedule of compromise penalties X.

Informer’s Reward Sec. 282 NIRC of 1997 Rev. Memo Order No. 12-93 dated 1 February 1993 Guidelines in the filing of confidential information for violation of the NIRC and investigation by authorized revenue officer. Meralco Securities v. Savellano, 117 SCRA 704 Penid v. Virata, 121 SCRA 166 Com. of Internal Revenue v. Com. on Audit, 218 SCRA 203