Let's Talk Tax

Improving the compromise and abatement process

The Bureau of Internal Revenue (BIR) issued Revenue Memorandum Order (RMO) No. 4-2016 dated Jan. 25, 2016, which provides for additional guidelines on the BIR’s internal processing of applications for compromise settlement, abatement or cancellation of internal revenue tax liabilities provided for under Section 204 of the Tax Code, as amended.

Section 204 is intended to remedy the situation when there is a reasonable doubt in the validity of the claim against the taxpayer, or financial incapacity of the taxpayer to settle the assessed tax, to which a compromise settlement can be applied for. On the other hand, abatement or cancellation of the internal revenue tax liability is applied when there appears to be an unjust or excessive assessment, or when the costs of administration and collection of the assessed amount do not justify the amount due.

When a taxpayer decides to file an application for any of the remedies, the first stage is always to file the same with the Revenue District Office (RDO) or the Large Taxpayer Service (LTS), whichever has jurisdiction to the taxpayer, for the initial evaluation. This step generally takes years, despite constant follow-up by the applicant with the concerned RDO/LTS. If the latter finds the application to be meritorious, the RDO/LTS will prepare its recommendation letter, and then transfer the docket to the Technical Working Group/Committee (TWG/C) located in the BIR National Office.

The TWG/C, as the second stage, will again evaluate the docket and determine whether the application should be approved or denied.

In case of approval by the TWG/C, the docket will be transmitted to the National Evaluation Board or NEB (third stage) for further review and recommendation before sending to the Commissioner of the BIR (fourth and last stage) for final review and signature, if approved. Again, this process takes several months before a final decision.

The RMO 4-2016 further provides that the TWG/C process and evaluate each application in accordance with Revenue Regulation (RR) No. 30-2002, RR No. 13-2001 as amended by RR No 4-2012, and RMO 20-2007.

Perhaps as a means of achieving a high standard of evaluation at the second and third stages, these personnel are subject to sanctions such as demerits and administrative liability if the NEB or the Commissioner rule to the contrary and further determine that these bodies simply passed the case on for resolution by their superiors.

It must be noted, however, that these personnel are only given 15 days from receipt to evaluate the application. Unfortunately, this period may not be sufficient. To comply with this deadline and to avoid demerits or administrative liability, the personnel in the intermediate stages may simply deny the application. The consequence of a wrong recommendation to approve is more costly than immediate denial of the application.

On the other hand, if the application is denied, RMO 4-2016 provides that the concerned board or TWG/C, for abatement cases, or LTS Evaluation Board for compromise settlement cases, prepare the corresponding Notice of Denial, together with the entire docket of the application, which will be transmitted to the Accounts Receivable Monitoring Division (ARMD) within 10 days from such denial.

The ARMD is mandated to record and monitor the application, and is required to transmit it within five days from receipt to the office of the BIR Commissioner for signature. No further review or evaluation is required. After the approval of the notice by the Commissioner, the notice and docket will go back to the ARMD for recording, and then to the originating revenue office for the appropriate service of the Notice to the taxpayer, and immediate collection of the outstanding tax liabilities.

After the transfer of the docket to the BIR Commissioner, no period to transmit is mandated by the RMO 4-2016, which leaves room for possible delay in the processing of the Notice of Denial, until its receipt by the applicant.

Further, if denied, the RMO 4-2016 does not provide any recourse for the taxpayer, such as an appeal to the Commissioner. Thus, if there is a meritorious explanation against the denial of the TWG/C or board, the taxpayer is deprived of such administrative remedy.

The only positive aspect of RMO 4-2016 is that an internal mandatory period of filing of reports, evaluation, and transmittal of records from one BIR office to another, is directed. However, majority of these mandatory periods only pertain to denied applications. In addition, RMO 4-2016 is not applicable to applications transmitted to and pending with the TWG/C or board as of Jan. 29, 2016.

A more definitive time frame should also be implemented for applications recommended for approval. Not only will this immediately thresh out the issues raised therein, it will also be removed from the long line of applications received by the BIR from all the taxpayers in the country. On the business side, the taxpayer will be able to close the subject in its books and have a peace of mind that he/she no longer has possible payables with the BIR in the future.

In fact, one taxpayer applied for compromise settlement in 2004 for the assessed amount for the taxable year of 2000. The taxpayer was forced to withdraw the application and settle the remaining amount in the year 2015, due to the tax clearance pre-requisite in its business endeavor. Imagine the horror of the taxpayer when it learned the total amount of tax liabilities, inclusive of the penalties and interests, arising from the delay in the processing of the application that is already beyond the control of the taxpayer.

Does Section 204 of the Tax Code still provide an effective remedy for the taxpayer, as initially intended by the authors of the said law? or is it now just for the benefit of the BIR at the expense of the taxpayer? In consideration of the costs, benefits and enormous resources to be burned by the taxpayer, is it still economically sensible? The taxpayer must contemplate all factors before availing of the “remedy” offered by Section 204 of the Tax Code. It must be reiterated that the interest on the outstanding liability is still running against the taxpayer until full payment.

Either way, it seems that the taxpayer will always be at the losing end.

In the worst-case scenario, there will always be a judicial remedy. However, why submit the issue to the Courts, when it can readily be settled at administrative level? Or ideally, at least, the approval or denial must be made administratively at the BIR level for a short and specific period of time.

The BIR would be leaving a valuable legacy if it can come up with effective guidelines in its internal processing of applications that produced more timely decisions on remedies, for the genuine benefit of both the taxpayer and the BIR.

Keeping my fingers crossed.

Maridelle M. Ramos is a senior tax associate of the Tax Advisory and Compliance division of Punongbayan & Araullo.