The COVID-19 vaccine is just around the corner but the challenges of the first quarter must still hold our attention. The news is full of headlines on the Philippines’ budget deficit growing to a record P1.37 trillion and the debt-to-GDP ratio rising to 54.5% at the end of 2020. The increased need to address the burgeoning deficit and debt leaves the government scrambling to raise revenue.
When tax people hear the phrase “raise revenue,” they think of increased Bureau of Internal Revenue (BIR) audits and tax disputes to make up for shortfalls. Several scenarios that can pose challenges and burdens to taxpayers come to mind. Two recent challenges relate to denial of Voluntary Assessment and Payment Program (VAPP) availment and issuance of subpoena duces tecum (SDT).
In September, the BIR issued Revenue Regulation (RR) No. 21-2020 for the implementation of VAPP for Taxable Year 2018 under certain conditions. One of the objectives of the RR is to reduce the number of audit investigations by encouraging voluntary payment of additional taxes.
However, there have been situations when the BIR denied VAPP availment. One of the denials was due to non-withholding of taxes. On another occasion, the BIR attempted to deny availment on the basis of an assessment finding for disallowed expenses which translated to overstatement of expenses by more than 30%.
In the case involving alleged non-withholding of taxes, it is important to note the difference between non-withholding of taxes and non-remittance of withholding taxes. What invalidates the VAPP availment is non-remittance of taxes that had in fact been withheld by a designated withholding agent — which is akin to theft of government tax revenue. It should be noted that mere non-withholding is not grounds for invalidation.
As for the overstatement of expenses case, the regulations provide that for VAPP availment to be invalidated, there must be “strong” evidence or findings of overstatement of deductions by more than 30%. This seems to be rooted in the Tax Code provisions on fraud, i.e., that under-declaring income or overstating deductions by more than 30% constitutes prima facie evidence of fraud. However, it must be emphasized that there must be strong evidence based on facts. The burden of establishing such strong evidence falls upon the BIR.
Many taxpayers avail of the VAPP in the hope of avoiding or putting an end to tax disputes. We can only imagine them clinging on in the hope of surviving yet another audit. Invalidating availments based on questionable application of the rules undermines confidence in VAPP.
Another challenge in tax assessment cases is the issuance of SDT. To many, the mere mention of the word “subpoena” is threatening. SDT is a process directed to a person requiring him to bring any books, documents, or other paraphernalia under his control. Basically, this type of subpoena is issued for presentation of documents that are necessary for the BIR to conduct an audit.
The problem, however, is that there are instances when subpoenas are issued even when there was prior submission of documents. The usual list attached to the Letter of Authority (LoA) issued to taxpayers is a long one. At times, taxpayers can submit majority of the documents, but not all due to the sheer volume of requirements. The problem is confounded today by the fact that retrieving documents in our COVID-stricken world can be a nightmare. When would such a subpoena be deemed absolutely necessary?
Under BIR regulations, a subpoena can be issued if the information or records requested are not furnished within the period prescribed or when the information or records submitted are incomplete. The word “incomplete” may be overly broad. Some taxpayers ask whether the examiner, during the examination stage, really needs 100% of such records. Even the BIR’s Handbook on Audit Procedures and Techniques allows for sampling, which is defined as the application of examination procedures to less than 100% of the items in an account to verify accuracy.
The concern is that the subpoena needs to be used fairly. At a time when everyone’s stress levels are at an all-time high, the issuance of SDTs for questionable “incomplete” submissions may be uncalled for.
With the array of concerns about erroneous denial of VAPP and unreasonable issuance of SDTs, it is no surprise that taxpayers are wishing for an improved BIR approach and for a healthier dispute resolution process in these difficult times.
An apt reminder in raising revenues in this time of crisis is the Supreme Court pronouncement in the case of Roxas vs. Court of Tax Appeals: “The power of taxation is sometimes called also the power to destroy. Therefore, it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally, and uniformly, lest the tax collector kill the ‘hen that lays the golden egg.’ And in order to maintain the general public’s trust and confidence in the Government, this power must be used justly and not treacherously.”
Yes, taxes are the lifeblood of the nation, but the most sustainable source of increased government revenue should come from growth spurred by increased business activity, profits, and increased employment. This will not happen if we kill today the “hen that lays the golden egg.”
Diana Elaine B. Bataller-Simbulan is a manager of the Tax Advisory and Compliance Division of P&A Grant Thornton.
As published in BusinessWorld, dated 09 March 2021