March is International Women’s Month; we are celebrating the contributions of women to society, upholding women’s rights, and advocating women empowerment.
Speaking of empowerment, the Bureau of Internal Revenue (BIR) recently issued Revenue Memorandum Circular (RMC) No. 15-2020, directing all revenue officials and employees to provide a printed copy of the procedures in a tax assessment. RMC No. 15-2020 intends to inform taxpayers on the proper procedures in responding to a deficiency tax assessment arising from the conduct of an audit or investigation. Printed guidelines detailing the procedures shall be furnished to the taxpayer; and the revenue officer is required to fully explain the contents to the taxpayer. The RMC was issued in line with a BIR campaign to empower taxpayers with a clear understanding of their rights to due process on administrative protests at the beginning of the audit or assessment.
The BIR’s efforts in highlighting taxpayers’ rights to due process were lauded when the Bureau issued Revenue Regulations (RR) No. 7-2018, restoring the provision on Notice of Informal Conference (NIC). The provision was restored to give the taxpayer an opportunity to present his or her side of the case. The NIC stage provided in RR No. 12-99 was previously revoked by RR No. 18-2013.
During the effectivity of RR No. 18-2013, no other discussion could take place after the Letter of Authority (LoA) is served to the taxpayer and the documents are provided to the BIR. After the documents are evaluated and the BIR determines that there is sufficient basis to assess the taxpayer for deficiency tax, a Preliminary Assessment Notice (PAN) is issued. The taxpayer was given only 15 days to respond, after which a Final Assessment Notice (FAN) was promptly issued and the taxpayers would either need to pay the assessment or file an administrative protest. After five years of effectivity, the BIR recognized that RR No. 18-2013 was demanding and that doing away with the NIC stage made the assessment process more challenging instead of more efficient.
As a tax practitioner handling mostly assessment cases, I have come to appreciate the restoration of the NIC in RR No. 7-2018. Discussing the itemized audit finding in an assessment is not easy with the constant, back-and-forth discussions with the BIR on the factual and legal basis of the taxpayer’s contentions. The issuance of RMC No. 15-2020 bolstered the purpose of RR No. 7-2018: to give the taxpayer the opportunity to present their case and exercise their right to due process. RMC 15-2020 prescribes how taxpayers are to be informed of the procedures in responding to the issuance of deficiency tax assessments arising from the conduct of an audit or investigation. Printed guidelines, as provided in Annex A of the RMC, must be furnished to the taxpayer during the Discussion of Discrepancy stage of the assessment. More importantly, Annex A also clearly identifies the type of assessment documents that must be issued by the BIR and the proper BIR official who must issue such assessment document.
Any findings of discrepancies or disallowances that may lead to deficiency assessments that were discovered during the audit or investigation by the BIR are to be sent in a “Notice of Discrepancy.” The contents of the Notice must be explained by the BIR to the taxpayers or their authorized representative during the Discussion of Discrepancy. If the taxpayer agrees with the audit findings as presented and explained, the taxpayer may sign the “Agreement Form” and pay the deficiency taxes, including penalties and interest.
Currently, the BIR issues the NIC and, if the taxpayer does not contest the findings, the amount contained in the NIC will be settled by the taxpayer. I have encountered several cases wherein the Notice of Informal Conference was sent accompanied by some sort of agreement form, where options were presented to the taxpayer: if the taxpayer fully subscribes to the findings, if the taxpayer does not subscribe, or if the taxpayer wants to avail of other administrative and legal remedies.
Aside from the NIC, discussions between the taxpayer and the BIR are encouraged in order to duly inform the taxpayer of their assessment. Based on my experience, there are many issues that can be resolved at this stage, considering the BIR and the taxpayer can freely discuss issues that can be easily resolved. In cases where an Improperly Accumulated Earning Tax (IAET) is being assessed, for example, the taxpayer can present proof that its ultimate parent is a publicly held company or that a loan agreement exists, which restricts the company from declaring dividends unless the loan is paid. There are also other items in the assessment that can be easily cancelled if the proper explanation and evidence is presented, such as professional expenses that were not subject to withholding tax, because they were paid to General Professional Partnerships or certain compensation expenses that were not subject to withholding tax on compensation, because they were paid to minimum wage earners.
If these issues are properly explained and resolved during the discussion stage, there is no need to include these items in the deficiency assessment. The BIR and the taxpayer can concentrate on the more contentious items. More often than not, the taxpayer gets intimidated by the size of the deficiency assessment presented in the BIR’s initial findings; thus, making the task seem insurmountable and hopeless.
The new circular (RMC 15-2020) will be appreciated if the contents of Annex A are fully discussed with the taxpayer and both parties can properly follow the procedures. It is when the BIR deviates from the established procedures that the taxpayer gets lost and is unable to decide on a course of action. One can hope that the RMC will achieve its true purpose of reinforcing the right to due process of taxpayers. Sometimes, the taxpayer is powerless to contend with the discretionary powers of the BIR during the assessment and is left with no recourse in the event such discretion is exercised. To be empowered with the information given and explained during the initial stage is indeed a welcome step forward. I hope that with the issuance of the RMC the procedures outlined are followed, giving both parties clarity and guidance on the entire assessment process.
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.
Gemmalu O. Molleno-Placido is a senior associate of Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.
As published in BusinessWorld, dated 10 Marc 2020