ASG Law

Tag: NIRC Section 228

  • Understanding the Difference Between Tax Assessments and Compliance Notices in the Philippines

    Key Takeaway: Distinguishing Between Tax Assessments and Compliance Notices is Crucial for Taxpayers

    Bakbak (1 and 2) Native Chicken Restaurant, Represented by the Owner Rosselle G. Barco, Petitioner, vs. Secretary of Finance, Commissioner of Internal Revenue, and/or Responsible Officers, Namely: Nestor S. Valeroso, Regional Director; Respondents. G.R. No. 217610, September 02, 2020

    Imagine running a successful restaurant, only to find yourself entangled in a legal battle with the tax authorities over notices that you thought were formal assessments. This is precisely what happened to Bakbak Native Chicken Restaurant, highlighting the critical need for businesses to understand the nuances of tax compliance notices versus formal assessments. At the heart of this case is the question of whether Revenue Memorandum Orders (RMOs) that outline procedures for tax compliance notices conflict with the National Internal Revenue Code (NIRC) provisions on tax assessments.

    Bakbak, a thriving food business, faced scrutiny from the Bureau of Internal Revenue (BIR) over its tax compliance. The BIR conducted a surveillance operation under the Oplan Kandado program, which aims to enforce VAT compliance. The subsequent notices and meetings led Bakbak to challenge the validity of the RMOs in court, asserting that these notices should be treated as formal assessments under Section 228 of the NIRC, which provides a 30-day period to protest assessments.

    Legal Context: Understanding Tax Assessments and Compliance Notices

    In the Philippines, the NIRC governs tax administration and enforcement. Section 228 of the NIRC outlines the procedure for protesting a tax assessment, which includes a formal notice containing a computation of tax liabilities and a demand for payment within a prescribed period. This section ensures that taxpayers have the right to protest within 30 days from receipt of the assessment.

    On the other hand, Section 115 of the NIRC empowers the Commissioner of Internal Revenue (CIR) to suspend the business operations of a taxpayer for violations such as failure to issue receipts or invoices, failure to file VAT returns, or understating taxable sales by 30% or more. The RMOs in question implement these provisions by prescribing the procedures for issuing compliance notices, which are distinct from formal assessments.

    Tax Assessment refers to a formal notice that not only computes the tax liability but also demands payment within a specified timeframe. It triggers the right to protest under Section 228.

    Compliance Notice, such as the 5-Day VAT Compliance Notice, requires taxpayers to rectify non-compliance with tax laws but does not constitute a formal assessment. It does not trigger the 30-day protest period under Section 228.

    For instance, if a restaurant owner receives a notice to submit books of accounts due to suspected under-declaration of sales, this is a compliance notice. However, if the notice includes a specific tax liability amount and a demand for immediate payment, it would be considered an assessment.

    Case Breakdown: Bakbak’s Journey Through the Courts

    Bakbak’s ordeal began when the BIR conducted a 10-day surveillance in April 2008, uncovering discrepancies in the restaurant’s declared sales. The BIR issued several notices, including a letter dated July 17, 2008, informing Bakbak of the under-declaration and requiring it to present its side within five days. Subsequent notices followed, each demanding submission of books of accounts and compliance with VAT registration.

    Amidst these notices, Bakbak’s owner, Federico Barco, was approached by BIR officials who allegedly solicited land in exchange for resolving the tax issues. Despite these encounters, no formal assessment was issued. Bakbak, feeling pressured, filed a case in the Regional Trial Court (RTC) in March 2009, challenging the constitutionality of RMOs 20-2002 and 31-2002, which they claimed violated their right to due process by providing only five days to respond instead of the 30 days mandated by Section 228.

    The RTC initially declared the RMOs void, but the Court of Appeals (CA) overturned this decision, distinguishing between the procedures for assessments under Section 228 and compliance notices under Section 115. The CA emphasized that the notices sent to Bakbak were not assessments but were aimed at ensuring compliance with VAT requirements.

    The Supreme Court upheld the CA’s decision, stating:

    “Not all notices and letters coming from the BIR can be deemed assessments. As concluded by the CA, the letters sent to Bakbak were not in the nature of an assessment which may be protested against under Section 228 of the NIRC.”

    Furthermore, the Court clarified:

    “Section 115 and Section 228 pertain to entirely different matters.”

    The Court also noted that Bakbak had ample time to comply with the BIR’s directives, from July 2008 to February 2009, yet failed to do so.

    Practical Implications: Navigating Tax Compliance Notices

    This ruling underscores the importance of understanding the distinction between tax assessments and compliance notices. Businesses must recognize that compliance notices are not formal assessments and do not trigger the same procedural rights. When receiving a compliance notice, taxpayers should:

    • Immediately review the notice to understand the specific requirements and deadlines.
    • Consult with a tax professional to ensure proper compliance and avoid potential penalties.
    • Keep detailed records and be prepared to submit them promptly if requested by the BIR.

    Key Lessons:

    • Compliance notices are not assessments and do not require a formal protest under Section 228.
    • Businesses should take compliance notices seriously and respond promptly to avoid escalation to formal assessments or business closure.
    • Understanding the legal basis and procedural requirements of different BIR notices can save businesses from legal and financial troubles.

    Frequently Asked Questions

    What is the difference between a tax assessment and a compliance notice?

    A tax assessment is a formal notice that includes a computation of tax liability and a demand for payment, triggering the right to protest under Section 228 of the NIRC. A compliance notice, such as a VAT Compliance Notice, requires taxpayers to correct non-compliance but does not constitute an assessment.

    How should a business respond to a compliance notice from the BIR?

    A business should review the notice carefully, gather the required documents, and submit them within the specified timeframe. Consulting with a tax professional can help ensure proper compliance.

    Can a compliance notice lead to business closure?

    Yes, if a business fails to comply with the requirements in a compliance notice, the BIR may escalate the matter, potentially leading to a recommendation for business closure under Section 115 of the NIRC.

    What rights do taxpayers have when receiving a formal tax assessment?

    Taxpayers have the right to protest a formal assessment within 30 days from receipt under Section 228 of the NIRC. This protest must be filed in writing and supported by relevant documents.

    How can a business avoid receiving compliance notices?

    Businesses can avoid compliance notices by ensuring accurate record-keeping, timely filing of tax returns, and compliance with all tax regulations, including issuing receipts and registering for VAT if required.

    ASG Law specializes in tax law and compliance. Contact us or email hello@asglawpartners.com to schedule a consultation.

  • Void Tax Assessment Decisions: Protecting Taxpayer Rights to Due Process

    The Supreme Court’s decision in Commissioner of Internal Revenue v. Liquigaz Philippines Corporation clarifies that a Final Decision on Disputed Assessment (FDDA) must detail the factual and legal bases for a tax assessment. If the FDDA lacks these details, it is deemed void, safeguarding the taxpayer’s right to due process by ensuring they can adequately challenge the assessment. This ruling reinforces the importance of transparency and fairness in tax assessments.

    Unveiling Tax Liabilities: Does Lack of Detail Void the Assessment?

    This case revolves around a tax assessment dispute between the Commissioner of Internal Revenue (CIR) and Liquigaz Philippines Corporation concerning deficiency withholding tax liabilities for the taxable year 2005. After an investigation, the CIR issued a Final Decision on Disputed Assessment (FDDA) against Liquigaz. However, Liquigaz contested the FDDA, arguing that it did not adequately detail the factual and legal bases for the assessment, particularly for the Expanded Withholding Tax (EWT) and Fringe Benefits Tax (FBT). The central legal question is whether an FDDA lacking specific details is void and, if so, what effect this has on the underlying tax assessment. This decision highlights the critical balance between the government’s power to collect taxes and the taxpayer’s right to due process, ensuring fair and transparent tax assessments.

    The Court of Tax Appeals (CTA) Division initially ruled that the FDDA was partially void concerning the EWT and FBT assessments. It reasoned that the FDDA failed to provide specific details, thereby preventing Liquigaz from understanding the basis for the deficiency assessments. However, the CTA Division upheld the Withholding Tax on Compensation (WTC) assessment, finding that the factual basis was sufficiently established. Subsequently, the CTA En Banc affirmed the CTA Division’s decision, emphasizing that the FDDA must state the facts and applicable laws; otherwise, it would be deemed void. This ruling underscores the importance of providing taxpayers with adequate notice and opportunity to contest assessments.

    The Supreme Court, in its analysis, affirmed the principle that a taxpayer must be informed in writing of the law and facts on which an assessment is made. This requirement is enshrined in Section 228 of the National Internal Revenue Code (NIRC) and further elaborated in Revenue Regulations (RR) No. 12-99. These legal provisions ensure that taxpayers are afforded due process and can intelligently protest or appeal assessments. The Court emphasized that this written notice requirement applies not only to the Formal Letter of Demand (FLD) and Formal Assessment Notice (FAN) but also to the FDDA.

    The significance of this written notice is rooted in the constitutional guarantee that no person shall be deprived of property without due process of law. A mere notification of tax liabilities without elaborating on the details is deemed insufficient. Due process requires that taxpayers be informed of the specific transactions and legal provisions that form the basis of the assessment. This ensures that taxpayers can effectively present their case and adduce supporting evidence.

    However, the Supreme Court clarified that a void FDDA does not automatically render the underlying assessment void. The Court differentiated between an “assessment” and a “decision,” citing St. Stephen’s Association v. Collector of Internal Revenue. An assessment becomes disputed when a taxpayer files a protest, and the CIR subsequently issues a decision or fails to act, which is then appealable to the CTA. The Court explained:

    In the first place, we believe the respondent court erred in holding that the assessment in question is the respondent Collector’s decision or ruling appealable to it, and that consequently, the period of thirty days prescribed by section li of Republic Act No. 1125 within which petitioner should have appealed to the respondent court must be counted from its receipt of said assessment. Where a taxpayer questions an assessment and asks the Collector to reconsider or cancel the same because he (the taxpayer) believes he is not liable therefor, the assessment becomes a ‘disputed assessment’ that the Collector must decide, and the taxpayer can appeal to the Court of Tax Appeals only upon receipt of the decision of the Collector on the disputed assessment, in accordance with paragraph (1) of section 7, Republic Act No. 1125, conferring appellate jurisdiction upon the Court of Tax Appeals to review ‘decisions of the Collector of Internal Revenue in cases involving disputed assessment…’

    The Supreme Court noted that RR No. 12-99 fills the gap in Section 228 of the NIRC by stating that failure of the FDDA to reflect the facts and law on which it is based will make the decision void, but this does not extend to nullification of the entire assessment. As such, the Court held that the CTA erred in concluding that the assessment on EWT and FBT deficiency was void simply because the FDDA was void. Instead, the case was remanded to the CTA for further evaluation of the EWT and FBT assessments based on available evidence, treating the void FDDA as a denial by inaction.

    The Court also affirmed the CTA’s decision regarding the WTC assessment, finding that the FDDA substantially informed Liquigaz of its tax liabilities. The basis for the assessment was the same in both the FLD and the FDDA, involving a comparison of salaries reflected in the Income Tax Return (ITR) and the alphalist, resulting in a discrepancy. Furthermore, the change in the amount of assessed deficiency withholding taxes on compensation merely arose from the modification of the tax rates used, which Liquigaz itself proposed.

    In summary, the Supreme Court’s ruling emphasizes the mandatory nature of providing taxpayers with written notice of the factual and legal bases of tax assessments. While a void FDDA does not automatically invalidate the assessment, it necessitates further evaluation by the CTA based on available evidence. This decision reinforces the importance of due process in tax assessments and ensures that taxpayers have adequate opportunity to understand and contest their liabilities.

    FAQs

    What was the key issue in this case? The key issue was whether a Final Decision on Disputed Assessment (FDDA) lacking specific details on the factual and legal bases for the tax assessment is considered void, and if so, what the effect of that is on the assessment itself.
    What is a Final Decision on Disputed Assessment (FDDA)? An FDDA is the Commissioner of Internal Revenue’s decision on a taxpayer’s protest against a tax assessment, which may be appealed to the Court of Tax Appeals (CTA). It represents the final determination of the taxpayer’s liability at the administrative level.
    What happens if the FDDA is found to be void? If the FDDA is void due to lack of details, the assessment itself is not automatically invalidated. Instead, it is treated as if there was no decision rendered by the CIR, which may still be appealed before the CTA and the assessment evaluated on the basis of the available evidence and documents.
    Why is it important for the FDDA to state the factual and legal bases of the assessment? Stating the factual and legal bases is crucial for due process, allowing taxpayers to understand the assessment and prepare an intelligent protest or appeal. Without this information, taxpayers are deprived of the opportunity to challenge the assessment effectively.
    Does this ruling mean all tax assessments without detailed explanations are invalid? No, the ruling distinguishes between the assessment itself and the decision on a disputed assessment (FDDA). The assessment may still be valid even if the FDDA is void, requiring further evaluation by the CTA.
    What is the effect of Revenue Regulations (RR) No. 12-99 on this case? RR No. 12-99 implements Section 228 of the NIRC and clarifies that a void FDDA does not nullify the entire assessment. It provides that failure to state the facts and law in the FDDA renders the decision void, but the assessment remains valid for further review.
    What specific taxes were at issue in this case? The taxes at issue were Expanded Withholding Tax (EWT), Withholding Tax on Compensation (WTC), and Fringe Benefits Tax (FBT).
    How did the Supreme Court rule on the Withholding Tax on Compensation (WTC) assessment? The Supreme Court affirmed the CTA’s decision upholding the WTC assessment, finding that the FDDA adequately informed Liquigaz of the basis for the assessment and the change in the amount of assessed deficiency withholding taxes on compensation merely arose from the modification of the tax rates used.

    This case underscores the importance of due process in tax assessments and serves as a reminder for both taxpayers and the BIR to ensure that all assessments are transparent and based on clear factual and legal grounds. This decision encourages a more thorough and fair approach to tax collection and dispute resolution.

    For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

    Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
    Source: Commissioner of Internal Revenue vs. Liquigaz Philippines Corporation, G.R. No. 215557, April 18, 2016