Due process is an obligation of the state to respect all the legal rights owed to a person. This balances the power of law of the land and protects the individual person from it. In law, due process contemplates notice and opportunity to be heard before judgment is rendered.
Applying the principle of due process to my 4-year-old daughter on using her iPad gadget, I, as her mother, who has a parental right over her, would not be fair by simply telling her that I do not want her to use it anymore without letting her explain her side. She would explain her ownership of the iPad, and therefore, this gives her the right to use it. While telling her the limitations, due process will proceed until we resolve that she can no longer use it.
The same is true for the Bureau of Internal Revenue’s (BIR) tax assessment. Due process is enshrined in our Tax Code.
Under Section 228 of the Tax Code, when the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings.
Specifically, the tax assessment regulations (i.e. Revenue Regulations (RR) No. 12-99, as amended by RR No. 18-2013 and RR No. 07-2018) previously requires the issuance of Notice of Informal Conference (NIC) which provides the taxpayer with the opportunity to present and explain his side on the initial findings by the BIR.
In addition, under RR No. 07-2018 which reinstated the issuance of NIC, the Revenue Officer who audited the taxpayer's records shall state in his report whether or not the taxpayer agrees with his findings that the taxpayer is liable for deficiency taxes. If the taxpayer is not amenable, based on the said Officer's submitted report of investigation, the taxpayer shall be informed, in writing through the issuance of NIC, of the discrepancies in the taxpayer's payment of his internal revenue taxes.
Based on the said provisions of RR No. 07-2018, the taxpayer can still have discussions with the revenue officer of its initial findings before the issuance of the NIC. Because of this discussion, there are occasions that the huge amount of findings (e.g. from the mere comparison of income and expenses per books against amounts declared per returns) which can easily be explained by the taxpayers are no longer included in the NIC.
However, as cited in news published by Manila Bulletin and Business World, the BIR thinks that such the NIC process drags the assessment process too long and that the NIC actually contains BIR’s initial discrepancies noted. Thus, the BIR updated the issuance of NIC under the recently issued RR No. 22-2020.
Under RR No. 22-2020, a Notice of Discrepancy (ND), instead of a NIC, will be issued to the taxpayer if he is found to be liable for deficiency taxes during an investigation conducted by a revenue office. It seems now that the discussions of initial findings prior to the issuance of ND would be strictly not allowed. Discussions and explanations of the taxpayer on the BIR’s initial findings will only happen after the issuance of the ND.
Based on the prescribed template for the ND, the taxpayer must be able to present and explain its side on the discrepancies noted by the BIR within 5 days from receipt of the ND. In case the taxpayer needs more time to present documents, he may submit such documents and explanations after the discussion but within 30 days from receipt of the ND, but there can be no more discussion of discrepancies beyond 30 days from the receipt of the ND.
Also, the new issuance now explicitly provides that all documents supporting the taxpayer’s explanation must be submitted within the 30-day period.
Moreover, within 10 days from the conclusion of the discussion, the investigating officer shall endorse the case for review and approval for issuance of a Preliminary Assessment Notice (PAN) if the taxpayer is still found to be liable for deficiency taxes.
We understand the BIR’s need to expedite the assessment process which is beneficial also to the taxpayer for the early closure of tax assessment cases. However, since the Philippines is still under the state of emergency due to the COVID-19 pandemic and several lockdowns being implemented, the initial 5 day period which shall not extend beyond 30 days may be too short for the taxpayers to prepare and retrieve their supporting documents given their limited manpower due to skeletal workforce arrangements.
Taxpayers appeal that the BIR to allow extensions on the 30-day period before it proceeds to endorse the case for issuance of PAN. We also hope that the BIR has fully evaluated the taxpayer’s records prior to the issuance of the ND so that the notice will only include the real and actual possible tax exposure of the taxpayer. Otherwise, the initial 5-day period to present which shall not extend beyond 30 days will really be too short for the taxpayers to comply.
On the part of the taxpayer, it may opt to revisit its records now and do a tax compliance review. With this, it will be able to determine the procedures and practices that expose them to potential tax liabilities; quantify tax exposures, risks, and penalties; and eventually, determine the proper course of action and alternative tax-efficient policies and procedures which will help address potential tax findings in case of BIR audit. As they said, we should be ready with our umbrella before the rain. Given the stricter implementation of due process, arguments and supporting documents must be ready before a potential tax assessment.
As for my daughter’s usage of her iPad, the due process helped her understand that indeed her limited usage of the iPad is actually for her benefit. With this, I realized that I should be prepared enough with believable arguments in case of future due process discussions with my two daughters.
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.
Ma. Lourdes Politado-Aclan is a director from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd. For comments and inquiries, please email email@example.com.
As published in BusinessWorld, dated 22 September 2020