Choose your battles wisely

I can still clearly recall my father’s advice to choose my battles wisely because if I fight for the wrong one, I might lose the opportunity to win the important ones. I found it simple but meaningful as it can be applied to any battles we encounter in life.

The same principle applies to the battles of a taxpayer when it comes to tax assessments. Take for instance the case of Cagayan De Oro Doctors Inc. (Madonna and Child Hospital) v. Commissioner of Internal Revenue (CTA Case No. 9260 dated August 5, 2019). In the said case, the Bureau of Internal Revenue (BIR) issued a Preliminary Assessment Notice (PAN) on Aug. 15, 2013, informing Cagayan De Oro Doctors Inc. (CDODI) of the BIR’s assessment for deficiency value-added tax (VAT) and expanded withholding tax (EWT) for taxable year 2010.  Thereafter, on Sept. 25, 2013, the BIR issued a Formal Letter of Demand (FLD) and Assessment Notices which were received by CDODI on Oct. 12, 2013.

Consequently, on Oct. 23, 2013, CDODI filed a letter-protest to the FLD and Assessment Notices invoking the denial of due process in serving deficiency tax assessments. In protest, CDODI denied having received the PAN; but acknowledged receipt of the Notice of Informal Conference and FLD. It did not raise any arguments against any of the issues raised by the BIR in the FLD.  In reply, the BIR contended that the PAN was initially sent through registered mail but the same, together with the registry return receipt, was returned to them on Oct. 23, 2013.  Hence, the BIR immediately re-sent the PAN to CDODI on Oct. 25, 2013, which CDODI received on Nov. 14, 2013.

On Dec. 6, 2013, CDODI replied to the BIR reiterating its defense that it was denied due process because the FLD and Assessment Notices were served ahead of the re-issued PAN. Hence, on Jan.13 , 2014, the BIR issued an Amended FLD (AFLD) and Assessment Notices which were received by CDODI on Jan. 14 , 2014. Again, in its letter-protest to the AFLD, CDODI reiterated its argument that the BIR violated the due process to be observed in serving deficiency tax assessments.

During the trial of the case at the CTA, the BIR argued that the requirement of due process was properly complied with when it issued the AFLD and Assessment Notices more than 15 days after CDODI’s receipt of the re-issued PAN. CDODI, however, claimed that the issuance of the said AFLD was merely an afterthought to cover up the BIR’s lapse in serving the original FLD and Assessment Notices.

The CTA ruled in favor of the BIR. To the mind of the CTA, while CDODI received the FLD and Assessment Notices prior to the receipt of the re-issued PAN, the BIR’s issuance of the AFLD and Assessment Notices superseded and supplanted the initially issued FLD and Assessment Notices. Further, CDODI has been given the opportunity to be informed of its deficiency tax assessment and the right to dispute the same since the AFLD and Assessment Notices were served after the reglementary 15-day period from the receipt of the re-issued PAN. In sum, the CTA ruled that the BIR has substantially complied with the due process requirement in the issuance of the subject tax assessments.

Under Section 228 of the Tax Code, the taxpayer shall be informed in writing of the law and the facts on which the assessment was made; otherwise, the assessment shall be void. Moreover, the taxpayer shall be required to respond to the said notice within a period prescribed by implementing regulations. If the taxpayer fails to respond, the BIR shall issue an assessment on his findings.  Relative thereto, Revenue Regulations (RR) 12-99 provides that if there is sufficient basis to assess the taxpayer for any deficiency tax, generally, the BIR shall issue a PAN to the taxpayer, at least by registered mail; otherwise, the assessment shall be void. Further, the taxpayer is given a period of fifteen days from the date of receipt of the PAN to respond after which the FLD and Assessment Notice calling for payment of the taxpayer’s deficiency tax or taxes shall be issued by the BIR.

From the foregoing, there are three vital elements that are relevant to the case of CDODI: (1) the re-issuance of the PAN, (2) the observance of the reglementary fifteen-day period before the issuance of the FLD and (3) the issuance of the AFLD and Assessment Notices.

In a deficiency tax assessment, the burden of proof is on the taxpayer contesting the validity or correctness of an assessment to prove not only that the BIR is wrong, but also that the taxpayer is right.  Thus, in the case of CDODI, since it did not refute the alleged deficiency VAT and EWT through submission of sufficient documentary evidence, CDODI has lost its opportunity to prove that it is not liable for deficiency VAT and EWT.

The decision of the CTA in this case may serve as an eye-opener to all taxpayers that whenever there are lapses on the procedures performed by the BIR in serving tax assessments that may seem to deprive the taxpayer of its right to due process, it is more prudent for the taxpayers to avoid limiting its arguments on technical issues.  Instead, taxpayers should also refute the BIR’s findings based on facts and existing supporting evidence. Invoking the constitutional right to due process alone without presenting sufficient and competent evidence to support the taxpayer’s arguments against the BIR’s findings is like taking a leap of faith. At the end of the day, the burden of proof is on the taxpayer contesting the validity or correctness of an assessment to prove not only that the Philippine taxing authority is wrong, but also that the taxpayer is right. As a piece of advice, when it comes to tax assessments, taxpayers should choose their battles wisely.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email [email protected] or [email protected].