Being the subject of an audit by the Bureau of Internal Revenue (BIR) is a daunting challenge for any taxpayer. A single mistake could cost the taxpayer millions and put him in deep financial straits. As such, it is important for the taxpayer to keep abreast of recent developments in tax rules and regulations so that they may better protect themselves against any possible mistake.

One such development would be the recent case of Light Rail Transit v. Bureau of Internal Revenue (LRT v. BIR, G.R. No. 231238, June 29, 2022). In this case, the Supreme Court (SC) laid down some enlightening rules on the enforcement of collection of the BIR while pending appeal and the nature of a Warrant of Distraint and Levy (WDL) which we will now seek to break down for the taxpayer’s benefit.

WDL is not a final decision of the CIR

Oftentimes, taxpayers would file a request for reconsideration to appeal the final decision on disputed assessments (FDDA) to the office of the BIR Commissioner. Taxpayers would usually resort to this appeal process to avoid going to court which is expensive and time-consuming. However, despite the pending an appeal to the office of the Commissioner, the BIR will start the collection process, leaving the taxpayer in a quandary as to why the BIR is already collecting when the assessment is still pending appeal.

Such was the situation in the Light Rail Transit case. In this case, while the FDDA was pending appeal to the office of the Commissioner of Internal Revenue (CIR), the RDO issued a Preliminary Collection Letter demanding payment of the deficiency taxes. The taxpayer informed the Regional Director that it had filed an appeal with the Commissioner. Nonetheless, the RDO issued a Final Notice Before Seizure. The taxpayer reiterated that its appeal was still pending with the Commissioner. The RDO then issued a Warrant of Distraint and/or Levy. Upon receipt of the decision on its appeal to the office of the CIR, the taxpayer filed the Petition for Review to the Court of Tax Appeals and later on a Petition for Certiorari to the Supreme Court.

One of the issues brought to the SC was whether the CTA had jurisdiction over the Petition for Review and whether the FDDA is the final decision of the respondent CIR appealable to the Court of Tax Appeals.

The BIR argued that the taxpayer should have gone to the CTA upon receipt of the WDL which, it averred, is tantamount to a final decision on appeal to the CIR. The CTA En Banc decided that the 30-day period for filing a petition for review should be reckoned from the day the taxpayer received a copy of the FDDA and not on the day it received the decision of the CIR on the appeal.

The SC ruled that a Preliminary Collection Letter, Final Notice Before Seizure, and/or WDL are not final decisions on the appeal by the CIR and therefore could not be considered as appealable to the Court of Tax Appeals (CTA). It also ruled that the FDDA was timely appealed to the CIR.

The SC ruled that the WDL, which was issued pending the appeal to the CIR, could not be considered as the decision appealable to the CTA because to rule so would deprive the taxpayer of the option of awaiting the decision of the CIR on its appeal.

This overturned the previous decision of the SC in the case of CIR v. Isabela Cultural Corporation (CIR v. ICC, 413 Phil. 276) wherein the SC ruled that the Final Notice Before Seizure is considered as a final decision of the CIR and is therefore appealable to the CTA. It should be noted that when CIR v. ICC was promulgated, the jurisdiction of the CTA had yet to be amended to add inactions of the Commissioner as appealable to the Court of Tax Appeals. In light of new legislation and recent jurisprudence, the case of CIR v. ICC is no longer controlling.

The SC noted that the Preliminary Collection Letter, the Final Notice Before Seizure, the Warrant of Distraint and/or Levy, the Letter reconsidering the issuance of the Warrant of Distraint and/or Levy, and the Letter dropping the request for reconsideration of the Warrant of Distraint and/or Levy were not final decisions on the appeal by the Commissioner of Internal Revenue. All of these were issued on the premise that "delinquent taxes" exist, an incorrect premise. The SC emphasized that the assessment was still pending appeal with the Office of the Commissioner when these issuances were made. They all emanated from a non-demandable assessment. As such, all were void and should be of no force and effect.

The SC also emphasized that in the case of a decision on the protest, the appeal must be filed 30 days from receipt of the adverse decision. On the other hand, in the case of inaction on the protest, the SC reiterated its rulings in the cases of Rizal Commercial Banking Corporation CIR and Lascona Land Co., Inc. v. CIR where it was clarified that a taxpayer may either:

(1) file a petition for review with the Court of Tax Appeals within 30 days after the expiration of the 180-day period fixed by law for the CIR to act on the disputed assessment; or

(2) await the final decision of the Commissioner on the disputed assessments and appeal such final decision to the Court of Tax Appeals within 30 days after receipt of a copy of such decision. This is true even if the 180-day period for the Commissioner to act on the disputed assessment had already expired. 

In this case, the taxpayer chose to wait for the FDDA and thereafter elevated it to the Commissioner within the 30-day period. Hence, it never became final, executory, and demandable.

The BIR has No Right to Collect Pending Appeal

The SC also ruled in the case of LRT v. BIR that a WDL, while the assessment is pending protest is void and of no effect, because the tax assessment on the taxpayer is not yet demandable.

Under Sections 205 and 207 of the Tax Code, a WDL is a civil remedy afforded to the government for the collection of delinquent taxes. As such, in order for a WDL to be validly issued, there must be delinquent taxes in the first place and there could only be delinquent taxes when the assessment has become final, executory, and demandable.

Subsection 3.1.5 of Revenue Regulation (R.R.) No. 12-99 provides that if the protest is elevated by the taxpayer to the CIR, the latter’s decision shall not be considered as final, executory, and demandable. As such, as long as the protest is still under appeal, the assessment issued by the BIR would not be considered as demandable. It being non-demandable, there are no delinquent taxes to collect and a WDL is not an available civil remedy to the government. Therefore, any WDL, while the assessment is pending appeal is void.

The next time the taxpayer receives a WDL while their assessment is pending appeal, the taxpayer need not be overly worried about it. The WDL is not considered as a final decision and therefore, the BIR should discontinue the practice of issuing WDL while the assessment is still being appealed. To do so causes unnecessary worry, time, and expense on the part of the taxpayer.

To anyone operating a business in the Philippines, being the subject of a BIR audit is inevitable. This is a necessary process to ensure that correct taxes are collected and paid. The process seems intimidating and causes an immeasurable amount of anxiety on the part of the taxpayer. This emphasizes the importance of being updated when it comes to tax regulations to better protect the taxpayer’s rights. It is our hope that by informing the taxpayer of new developments in the field of taxation, taxpayers would be better armed to tackle a BIR audit and make the task just a little bit more manageable.

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.


As published in BusinessWorld, dated 13 December 2022