The Bureau of Internal Revenue (BIR) is actively conducting audit of taxpayers. Recently, we have been seeing astronomical deficiency tax assessments from the BIR. One finding that the taxpayers always have trouble understanding is the deficiency assessment coming from third party information (TPI).
The BIR uses the Reconciliation of Listings for Enforcement (RELIEF) System for TPI audit.
The RELIEF System cross-references third party information from the taxpayers' Summary Lists of Sales and Purchases. The BIR also uses Third Party Matching-Bureau of Customs (TPM-BOC) Data Program to validate the correct amount of importations of the taxpayer.
Inconsistency uncovered in the TPI matching is assumed by the BIR as possible under-declaration of revenues/ over-declaration of cost and expenses, thus resulting in deficiency tax assessments for income tax, VAT and withholding taxes.
In this kind of assessment, we would assist the taxpayer in combing through voluminous records to reconcile the discrepancies. Armed with tax returns, accounting records and a Sworn Statement, we will inform the BIR that the third-party information is incorrect and that the amount declared by the taxpayer tallies with his books and other supporting documents. Unfortunately, this becomes a tax assessment version of “he said, she said” and thus, begins the arduous calvary of refuting the TPI findings.
In such situations, I cannot help but wonder why the BIR would often assume that the third-party information is correct while the taxpayer being audited is misdeclaring his income and expense. Fortunately, jurisprudence is replete with cases explaining when assessments from TPI are not reliable and thus, void.
Revenue Memorandum Order (RMO) No. 46-2004 requires that in the event that the taxpayer protests the accuracy of the data provided by third party sources, the BIR shall require the TPI provider to execute a Sworn Statement attesting to the correctness of the data provided. RMO 13-2012, states that if no response from the TPI source is received after the lapse of five (5) days from service or ten (10) days from mailing of the Confirmation Request, the revenue officer may consider the data to be true and correct.
In a CTA case, the BIR disclosed that they were not able to secure the confirmation from the TPI source. Instead, they relied on the portion of the BIR letter addressed to the third party stating that “(I)f this office does not receive any response from you within five (5) days from receipt of this letter, we will consider the above purchase/amounts to be true and correct.”
The CTA cancelled the assessment and ruled in favor of the taxpayer. In failing to fully validate the TPI, the assessment was not based on facts but merely on presumption. In another case, the CTA cancelled the assessment for failure of the BIR to offer in evidence the confirmation request letters and registry return receipts from the TPI sources.
In one case of alleged undeclared importation arising from matching with BOC data, the BIR used the Cost Ratio Method and grossed-up value of the undeclared importation. This resulted in a corresponding undeclared sale which was subjected to 12% output VAT thus, resulting in a deficiency VAT assessment.
The CTA cancelled the assessment and emphasized that for VAT to be imposed, there must be an actual or deemed sale of goods or services. Hence, no imposition or assessment of output VAT can arise from an alleged undeclared sales arising from under-declaration of importation.
In the same manner, a mere discrepancy arising from BOC TPI cannot translate to the taxpayer’s undeclared gain and sales subject to income tax. The CTA emphasized that for an income to be taxable, there must be gain or income realized or received by the taxpayer. Without proof of receipt of taxable income, the obligation to pay taxes does not arise. The CTA further goes to explain that “in importation, money is disbursed, rather than received; and goods or properties are purchased, rather than sold by the taxpayer. These concepts are anathema to the nature of income tax as a tax imposed on income received by the taxpayer; and VAT, as a tax imposed on the sale of goods or properties, among others.”
In various cases, the Supreme Court emphasized that tax assessments are presumed correct, made in good faith and based on sufficient evidence. However, the prima facie correctness of a tax assessment does not apply upon proof that an assessment is without foundation, meaning it is arbitrary and capricious. Paramount is the rule that the presumption of the correctness of an assessment, being a mere presumption, cannot be made to rest on another presumption.
Admittedly, the RELIEF system is a valuable source of information that the BIR can use in identifying taxpayers that may be subject to audit. However, the Courts have been consistent in ruling that the BIR must support its assessments with verified factual information.
While the Courts offer relief in cancelling assessments based on unverified TPI, this process is cumbersome and costly to the taxpayers. Reconciliations and documentation submitted to the BIR should be thoroughly assessed by the BIR to ensure that the right of the taxpayers to due process are observed even at the administrative process level. Resort to the Courts should be a last-ditch effort in view of the cost and effort needed. Taxpayers and the BIR should work hand in hand to ensure that correct taxes are paid, no more, no less.
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 05 September 2023