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Reply to PAN and due process

Many taxpayers believe that, in a tax assessment conducted by the Bureau of Internal Revenue (BIR), even though the taxpayers submit a reply to the Preliminary Assessment Notice (PAN), a Final Assessment Notice (FAN) or Formal Letter of Demand (FLD) will be issued against them by the BIR without considering the arguments laid down in the reply to PAN. Some have the impression that the FAN is already drafted or prepared ahead without waiting for the taxpayer’s reply to PAN. This is due to the observation that most of the time, the contents of the FAN are basically the same to that of the PAN. 

In a recent Court of Tax Appeals (CTA) Case promulgated on May 9, 2017 (CIR vs. Merial), what happened appeared to be obvious. In this case, the BIR issued the PAN to the taxpayer which was received by the taxpayer on Dec. 29, 2010. In the said PAN, the BIR informed the taxpayer that there were deficiencies in income tax, value-added tax, and expanded withholding tax. Subsequently, on Jan. 7, 2011, or nine days after the issuance of the PAN, the BIR issued an FLD, without waiting first for the taxpayer’s reply to PAN. 

In the above case, the taxpayer raised an issue of due process as the BIR appeared to have not strictly followed the tax assessment process. It should be noted that, as part of due process in BIR tax assessment procedures, a taxpayer has a 15-day period within which to submit to the BIR his reply to PAN as prescribed under the regulations. In the above case, the Court noticed that the said period was disregarded by the BIR.

The BIR countered that the taxpayer was not denied due process, notwithstanding the issuance of the FLD before the 15-day period, since the taxpayer, anyway, was actually able to submit a protest against the PAN and FLD “after” the taxpayer received the FLD.

In deciding the above case, the Court emphasized the importance of observing the due process requirements laid down in tax regulations. The right of the taxpayer to respond to the PAN is an essential part of the due process requirements. However, what happened in the above case was the issuance by the BIR of the FAN within the 15-day period, which was supposed to be the period within which the taxpayer had the right to reply first to the previous PAN. Hence, as explained by the Court, the failure of the BIR to strictly comply with the rules is a denial of the taxpayer’s right to due process. That being said, the FAN subsequently issued by the BIR against the taxpayer was adjudged to be void.

The above decision is consistent with other CTA cases such as the cases of Nippo Metal Tech Phils. vs. CIR (CTA case EB No. 1273) and CIR vs. Hermano San Miguel (CTA case No. 8095).

Due process must be observed. This is provided for by the tax laws and recognized by the courts. While it is a cardinal principle that taxes are the lifeblood of the government, it is a fundamental and primordial rule that no person shall be deprived of life, liberty and property without due process of law. Although taxation is vital and indispensable to our society, this must be exercised within the bounds of law and procedural requirements. As rights of the citizens are protected by the Bill of Rights under the Constitution, the due process clause is paramount to the power to tax by the government.

Needless to say, the 15-day period afforded to the taxpayers is to give them a reasonable opportunity to be heard at the PAN stage. However, it is the sentiment of the taxpayers that the essence of due process in BIR assessments will be defeated if taxpayers are merely given such opportunity but they are not actually heard. Consider the efforts exerted by the taxpayers at the PAN stage in extracting documents dating years back and the meticulous drafting of explanations and reconciliations, just to know later that their efforts will just be summarily disregarded as their reply to PAN has no value. We could just imagine how distressing that would be. 

It is a plea from taxpayers that, aside from respecting the prescribed 15-day period to reply to PAN afforded to the taxpayers, the BIR should take more time to read and consider any meritorious arguments of the taxpayers. Perhaps, the BIR may need to revisit its procedures and personnel requirements to give the revenue officers ample time to effectively read, review and consider the arguments laid down by the taxpayers at the PAN stage. After all, a reply to PAN is part of due process in a tax assessment case.

Flourence Kathrine S. Enriquez is a senior with the Tax Advisory and Compliance division of P&A Grant Thornton. P&A Grant Thornton is one the leading audit, tax, advisory and outsourcing services firm in the Philippines.


As published in BusinessWorld, dated on 27 June 2017