Forgiveness and redemption: Administrative amnesties

(Second of three parts)

In my previous article I discussed HB No. 2933, as amended by the Senate. This bill has been passed by both houses of Congress and now awaits the President’s approval before it can become law. Assuming that the President does not veto the measure it will be a true tax amnesty in the sense that, first, it is granted by the legislature with executive concurrence and, second, it grants an erring taxpayer immunity from payment of all taxes, surcharges and interest, as well as from criminal, civil, and administrative penalties. These immunities exist, of course, on the condition that the taxpayer complies with the requirements of the law. From a practical standpoint, another important immunity that the taxpayer shall enjoy is that his books of account and other records for the years covered by the tax amnesty cannot be examined.

I previously alluded to another form of amnesty that - for want of more accurate nomenclature – is commonly referred to as an administrative amnesty; that is, a forgiveness by the executive branch of tax liabilities. It is not an amnesty per se: not having been directly born of a legislative act it cannot, as a general rule, grant the same all-encompassing and ironclad immunities from taxation as only a true amnesty can. Nonetheless, by availing of its provisions, a taxpayer can still find some relief from the persistent attentions of the BIR.

Two existing revenue regulations (RRs) issued by the BIR are good examples of different types of administrative amnesties. The first is RR No. 15-2006, which is a one-time abatement of all administrative penalties, surcharges and interest on delinquent accounts ("the Abatement Program"). The second is RR No. 18-2006, which the BIR has named the Improved Voluntary Assessment Program, or IVAP. Both of these are still extant and are worth a visit.

The BIR first implemented the Abatement Program in August of 2006, and had intended it to run until Oct. 31, 2006. The BIR subsequently extended this three times, announcing the latest extension just before the Holy Week. It did this through Revenue Memorandum Circular No. 24-2007 which extended the deadline to June 29, 2007. RR No. 15-2006 was also amended by RR No. 3-2007 to expand the coverage of who may avail of the Abatement Program.

The Abatement Program gives delinquent taxpayers a chance to pay the entire basic tax due to the government without the need to pay all penalties, including surcharges and interest that normally accrue on late or deficient taxes. (Section 248 of the National Internal Revenue Code imposes a penalty of 25 percent of the unpaid taxes and 50 percent in the case of a willful neglect to file a tax return; while Section 249 imposes interest of 20 percent per annum on unpaid taxes.) Section 4 of RR 15-06 states that "after payment of the basic tax, the assessment for penalties/surcharge and interest shall be cancelled by the concerned BIR Office following existing rules and procedures. Thereafter, the docket of the case shall be forwarded to the Office of the Commission…for issuance of Termination Letter". The Termination Letter is important as it clears the taxpayer of any and all liabilities on the surcharges and interest that he incurred for late or deficient taxes.

The authority of the BIR to enter into an abatement program actually has legal or statutory basis in Section 204 of the NIRC, which allows the Commissioner of Internal Revenue to cancel a tax liability when (1) the tax or any portion of the tax appears to be unjustly or excessively assessed; or (2) the administration and collection costs involved do not justify the collection of the amount due.

The other variant of the administrative amnesty, the Improved Voluntary Assessment Program, bestows the privilege of "last priority in audit" to a qualified taxpayer. Under the IVAP taxpayers who, first, voluntarily pay taxes for the "applicable/covered year" in an amount at least 30 percent over the previous year’s tax due (in the case of net VAT due, three percent of gross sales/gross receipts of the applicable/covered year) and, second, whose payments conform to a schedule of values laid down by RR 18-06, shall be placed at the bottom of the BIR’s "hit list". Section 2 of RR 18-06 states that the audit of taxpayers shall automatically be suspended on the taxpayer’s filing of the application and payment of the IVAP amount and that the BIR shall cancel or withdraw Letters of Authority and Audit Notices, Letter Notices, Taxpayer Verification Notices, and Mission Orders issued against qualified availers.

Like the Abatement Program the IVAP has been extended – once again – to June 29, 2007.

The rationale behind the IVAP Program is that tax collection is enhanced by a tacit understanding between taxpayer and tax collector that if the tax is presumed to be correct (hence the criteria) then there is no need for the BIR to conduct costly audits and investigations. Scarce BIR resources, in terms of both manpower and money, can therefore be funneled elsewhere. Previous versions of voluntary assessment programs have also appealed to taxpayers’ patriotism, urging them to pay taxes in amounts more than what is required of them, all for the cause of "nation building".

Note that what the IVAP can only guarantee is a last priority in audit and not complete immunity from prosecution and inspection of books, as the proposed amnesty law offers. Strictly speaking, you can still get audited – just not immediately. Some would argue that immunity and last priority in audit status are, for all practical purposes, one and the same. However, a believer of Murphy’s Law would point out that you never know how short the priority list is and – theoretically, at least – you could soon find yourself at the top of that list. (To be concluded)

(Emmanuel P. Bonoan is Chief Operating Officer and Vice Chairman for Tax & Corporate Services of Manabat Sanagustin & Co., CPAs, a member firm of KPMG International, a Swiss Cooperative. Mr. Bonoan is a former Undersecretary of the Department of Finance. This article is for general information only and is not intended to be, nor is it a substitute for, informed professional advice. While due care was exercised to ensure the quality of the information contained in this article, readers should carefully evaluate its accuracy, completeness and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances. For comments or inquiries, please email [email protected] or [email protected].)