Tax Remedies

TAX REMEDIES TAX ADMINISTRATION

AND

ENFORCEMENT

IN GENERAL Agencies involved in tax administration 1.

Bureau of Internal Revenue

2.

Bureau of Customs

3.

Provincial, city and municipal assessors and treasurers

Bureau of Internal revenue •

Headed by the Commissioner and two Deputy Commissioners

•

Assistant Commissioners and Division Chiefs

•

Regional Directors

•

Revenue District Officers

•

Revenue Enforcement Officers or Examiners

POWERS

OF THE

COMMISSIONER

OF

INTERNAL REVENUE

General powers of the Commissioner of Internal Revenue 1.

Interpret tax laws and to decide tax cases.

2.

Obtain information and to summon, examine, and take testimony of persons.

3.

Make assessments and prescribe additional requirements for tax administration and enforcement.

173 TAX REMEDIES Power to interpret tax laws •

The power to interpret the provisions of the NIRC and other tax laws shall be under the exclusive and original jurisdiction of the Commissioner.

•

This power is subject to review by the Secretary of Finance.

Jurisdiction of Commissioner re. tax cases •

•

The Commissioner has the power to decide: 1.

disputed assessments;

2.

refunds of the internal revenue taxes, fees, or other charges;

3.

penalties imposed in relation thereto; or

4.

other matters arising under this Code or other laws or portions thereof administered by the Bureau of Internal Revenue.

This is subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.

Power of the Commissioner to obtain information, and to summon, examine, and take testimony of persons •

•

Commissioner has power to obtain information and to summon, examine, and take testimony of persons in: 1.

ascertaining the correctness of any return; or

2.

in making a return when none has been made; or

3.

in determining the liability of any person for any internal revenue tax; or

4.

in collecting any such liability; or

5.

in evaluating tax compliance.

Such power includes:

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MABUHAY EDITION 2000

174 TAX REMEDIES 1.

To examine any book, paper, record or other data which may be relevant or material to such inquiry.

2.

To obtain on a regular basis from any person other than the person whose internal revenue tax liability is subject to audit or investigation, or from any office or officer of the national and local governments, government agencies and instrumentalities any information.

3.

To summon the person liable for tax or required to file a return, or any officer or employee of such persons, or any person having possession, custody, or care of the books of accounts and other accounting records, or any other person, to appear before the Commissioner or his duly authorized representative.

4.

To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry.

5.

To cause revenue officers and employees to make a canvass from time to time of any revenue district or region and inquire after and concerning persons therein who may be liable to pay any internal revenue tax.

Power of the Commissioner to make assessments and prescribe additional requirements for tax administration and enforcement 1.

Examination of returns and determination of the tax due.

2.

Assess the proper tax on the best evidence obtainable.

3.

Conduct inventory-taking, surveillance and to prescribe presumptive gross sales and receipts

4.

Issue jeopardy assessments and terminate the taxable period.

5.

Prescribe real property values.

6.

Inquire into bank deposit accounts.

7.

Accredit and register tax agents.

8.

Prescribe additional procedural or documentary requirements.

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175 TAX REMEDIES Examination of returns and determination of the tax due •

After the filing of the return, the Commissioner or his duly authorized representative may authorize the examination of any taxpayer and the assessment of the correct amount of tax.

•

However, failure to file a return does not prevent the Commissioner from authorizing the examination of the taxpayer.

•

Any return, statement or declaration filed in any office authorized to receive the same shall not be withdrawn.

•

However, such may be modified, changed or amended within three (3) years from the date of their filing provided no notice for audit or investigation for such return, statement or declaration has been actually served upon the taxpayer.

Assess the proper tax on the best evidence obtainable •

•

A Commissioner is given the power to assess deficiency tax based on the best evidence obtainable: 1.

when a report required by law as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time limit fixed by law or rules and regulations; or

2.

when there is reason to believe that any such report is false, incomplete or erroneous.

In Bonifacia Sy Po. V. CTA, the Supreme Court upheld the assessment made by the Commissioner on the basis of the bottles of wine seized and the sworn statements of the former employees of the Silver Cup Wine Factory for failure of the latter’s proprietor to submit the factory’s book of accounts and related records despite repeated demands by the BIR.

Conduct inventory-taking, surveillance and to prescribe presumptive gross sales and receipts •

Commissioner may, at any time during the taxable year, order inventorytaking of goods of any taxpayer as a basis for determining his internal revenue tax liabilities.

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176 TAX REMEDIES •

Commissioner may also place the business operations of any person, natural or juridical, under observation or surveillance if there is reason to believe that such person is not declaring his correct income, sales or receipts for internal revenue tax purposes.

•

Commissioner may also prescribe presumptive gross sales and receipts in the following instances: 1.

When it is found that a person has failed to issue receipts and invoices in violation of the NIRC; or

2.

When there is reason to believe that the books of accounts or other records do not correctly reflect the declarations made or to be made in a return.

• Under the presumptive gross sales or receipts method, the Commissioner, after taking into account the sales, receipts, income, or other taxable base of other persons engaged in similar situations or circumstances or after considering other relevant information, prescribe a minimum amount of such gross receipts, sales, and taxable base. •

Such amount so prescribed shall be prima facie correct for purposes of determining the internal revenue tax liabilities of such person.

Issue jeopardy assessments and terminate the taxable period •

A jeopardy assessment is one issued by the Commissioner if he believes that the collection of the tax is in jeopardy due to delay and other causes.

•

The Commissioner may issue a jeopardy assessment when it comes to his knowledge that a taxpayer is: 1.

retiring from business subject to tax; or

2.

intending a.

to leave the Philippines; or

b.

to remove his property therefrom; or

c.

to hide or conceal his property; or

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177 TAX REMEDIES 3.

performing any act tending to obstruct the proceedings for the collection of the tax for the past or current quarter or year or to render the same totally or partly ineffective.

• In such cases, the Commissioner may assess and collect the tax immediately without the usual formalities. Among others, the Commissioner shall: 1.

declare the tax period of such taxpayer terminated any time; and

2.

send the taxpayer a notice of such decision together with a request for the immediate payment of the tax for the period so declared terminated and the tax for the preceding year or quarter, or such portion thereof as may be unpaid.

• Said taxes shall be due and payable immediately and shall be subject to all the penalties prescribed by law, unless paid within the time fixed in the demand made by the Commissioner. Prescribe real property values • Commissioner is empowered to divide the Philippines into different zones or areas and to determine the fair market value of real properties located in each zone or area after consultation with private and public appraisers. • For purposes of computing any internal revenue tax, the value of the property shall be, whichever is higher of: 1.

the fair market value as determined by the Commissioner; or

2.

the fair market value as shown by the schedule of values of the Provincial and City Assessors.

Inquire into bank deposit accounts •

Commissioner may inquire into the bank deposits of:

1.

a decedent to determine his gross estate; and

2.

any taxpayer who has filed an application for compromise of his tax liability by reason of financial incapacity to pay his tax liability.

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178 TAX REMEDIES • There is really no conflict with RA 1405 or the Law on Secrecy of Bank Deposits Act in case of compromises due to the financial inability to pay of the taxpayer since an application for compromise shall not be considered unless and until the taxpayer waives in writing his privilege under RA 1405. Such waiver constitutes the authority of the Commissioner to inquire into the bank deposits of the taxpayer.

RULE

ON

ESTOPPEL

AND

SOME COMPLIANCE REQUIREMENTS

Rule on no estoppel against the government •

It is a settled rule of law that in the performance of its governmental functions, the State cannot be estopped by the neglect of its agents and officers. Nowhere is this more true than in the field of taxation. [Commissioner v. Procter and Gamble Co., G.R. No. 66838, April 15, 1988]

•

Similarly, estoppel does not apply to deprive the government of its right to raise defenses even if these defenses are being raised for the first time on appeal. [Commissioner v. Procter and Gamble Co., G.R. No. 66838, April 15, 1988] However, this was reversed in a subsequent resolution issued by the Supreme Court in the same case. [Commissioner v. Procter and Gamble Co., G.R. No. 66838, December 2, 1991, Resolution)]

Estoppel against the taxpayer •

While the principle of estoppel may not be invoked against the government, this is not necessarily true in the case of the taxpayer.

Some compliance requirements •

All corporations, companies, partnerships or persons required by law to pay internal revenue taxes shall keep a journal and a ledger or their equivalents.

•

Those earning below P50,000 quarterly may adopt a simplified set of bookkeeping records.

•

Those earning more than P150,000 quarterly shall have their books of accounts audited and examined yearly by independent certified public accountants.

•

They have option to keep subsidiary books as the needs of their business may require.

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179 TAX REMEDIES

•

All books or records must be in a native language, English or Spanish, If not, translate to these languages.

•

All the books of accounts, including the subsidiary books and other accounting records, shall be preserved for a period beginning from the last entry in such book until the last day prescribed by Section 203 within which the Commissioner is authorized to make an assessment.

•

Said books and records may be examined only once in a taxable year, with some exceptions.

ASSESSMENT

OF

INTERNAL REVENUE TAXES

Tax assessment •

An assessment is the official action of an administrative officer in determining the amount of tax due from a taxpayer, or it may be a notice to the effect that the amount therein stated is due from a taxpayer as a tax with a demand for payment of the tax or deficiency stated therein.

•

An assessment is a finding by the taxing agency that the taxpayer has not paid his current taxes. It is also a notice to the effect that the amount stated therein is due as tax and is a demand for payment thereof.

•

The Local Government Code defines assessment as the act or process of determining the value of a property or portion thereof subject to tax, including the discovery, listing, classification, and appraisal of properties.

•

The BIR assessment is usually embodied in a demand letter or in a BIR form known as the assessment notice.

Letter of authority •

This is the authority issued by the Revenue Regional Director and given to a revenue officer assigned to perform assessment functions to examine taxpayers within the jurisdiction of the district in order to collect the correct amount of tax, or to recommend the assessment of any deficiency tax due in the same manner that the said acts could have been performed by the Revenue Regional Director himself.

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180 TAX REMEDIES

Kinds of assessment 1.

Self assessment

2.

Deficiency assessment

3.

Illegal and void assessment

4.

Erroneous assessment

Self assessment •

One in which the tax is assessed by the taxpayer himself.

•

The amount of tax is reflected in the tax return that is filed by him and the tax assessed is paid at the time he files the return. This system of filing of return and payment of tax is known as the “pay-as-you-file” system.

•

Tax so assessed is known as self assessed tax.

Deficiency assessment •

This is an assessment made by the tax assessor himself whereby the correct amount of the tax is determined after an examination or investigation is conducted.

•

The liability is determined and is thereafter assessed for the following reasons: 1.

The amount ascertained exceeds that which is shown as the tax by the taxpayer in his return;

2.

No amount of tax is shown in the return; or

3.

The taxpayer did not file any return at all.

Illegal and void assessment •

This is an assessment wherein the tax assessor has no power to act at all.

Erroneous assessment

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This is an assessment wherein the assessor has the power to assess but errs in the exercise of the power.

Principles governing tax assessments 1.

Assessments are prima facie presumed correct and made in good faith.

2.

Assessments should not be based on presumptions but on actual facts.

3.

Assessment is discretionary on the Commissioner who cannot therefore be compelled to assess a tax when he or she believes that there is no basis for such assessment.

4.

The authority vested in the Commissioner to assess taxes may be delegated. However, it is settled that the power to make final assessments cannot be delegated.

5.

Assessments must be directed to the right party.

Investigative power of the Commissioner; factual basis of assessments •

Inasmuch as assessments are based on facts, the Commissioner is given the power to obtain information which serves as basis for said assessments, and is also given the means to secure them. [See powers of the Commissioner]

Means employed in the assessment of taxes 1.

Examination of returns and determination of the tax due.

2.

Assess the proper tax on the best evidence obtainable.

3.

Conduct inventory-taking, surveillance and to prescribe presumptive gross sales and receipts

4.

Issue jeopardy assessments and terminate the taxable period.

5.

Prescribe real property values.

6.

Inquire into bank deposit accounts.

7.

Accredit and register tax agents.

8.

Prescribe additional procedural or documentary requirements.

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182 TAX REMEDIES

The net worth method •

A very effective method of determining taxable income and the deficiency income tax due thereon is the net worth method or what is otherwise known as the “inventory method of income tax verification.”

•

The method is an extension of the accounting principle: Assets minus liabilities equals net worth. The taxpayer’s net worth is determined both at the beginning and at the end of the same taxable year. The increase or decrease in net worth is adjusted by adding all non-deductible items and subtracting therefrom non-taxable receipts.

•

The legal basis for the use of the net worth method is the authority of the Commissioner to adopt an accounting method that clearly reflects the income.

Conditions for the use of the net worth method 1.

That the taxpayer’s books do not clearly reflect his income or the taxpayer has no books, or if he has books, he refuses to produce them.

2.

That there is evidence of a possible source or sources of income to account for the increases in net worth or the expenditures.

3.

That there is a fixed starting point or opening net worth.

4.

That the circumstances are such that the method does reflect the taxpayer’s income with reasonable accuracy and certainty and proper and just additions of personal expenses and other non-deductible expenditures were made and correct, fair and equitable credit adjustments were given by way of eliminating non-taxable items.

Requisites of a valid assessment 1.

Post-reporting notice or notice for an informal conference after the tax audit.

2.

Pre-assessment notice sent to the taxpayer, except in several instances.

3.

The taxpayers shall be informed in writing of the law and the facts upon which the assessment is made.

4.

Assessment must be made within the prescriptive period.

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183 TAX REMEDIES

Pre-assessment notice •

This is a notice in writing which is sent to the taxpayer at the address indicated in his return or at his last known address as stated in his notice of change of address if the Commissioner or his duly authorized representative finds that taxes should be assessed against the taxpayer. As such, the taxpayer is first notified of said findings before an assessment is issued.

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184 TAX REMEDIES When pre-assessment notice not required 1.

When the finding for any deficiency tax is the result of a mathematical error in the computation of the tax as appearing on the face of the return;

2.

When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent;

3.

When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year;

4.

When the excise tax due on excisable articles has not been paid; or

5.

When an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons.

Deficiency v. delinquency •

Deficiency is the amount by which the tax due exceeds the sum of the amount of the tax shown on a taxpayer’s return plus amounts previously assessed or collected as deficiency, less any credits, refunds, or other payments due the taxpayer, i.e. the amount a taxpayer is deficient in his tax payments.

•

Delinquency is the state of a person upon whom the personal obligation to pay the tax has been fixed by lawful assessment and he thereafter fails to pay the tax within the time prescribed by law.

PERIOD

OF

LIMITATION UPON ASSESSMENT

AND

COLLECTION

ASSESSMENT General Rule

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Assessment shall be made within three (3) years after the last day prescribed by law for the filing of the return or from the day the return was filed in case the return was filed beyond the period prescribed by law.

Exceptions 1.

2.

Assessment may be made within ten (10) years after the discovery of the falsity, fraud or omission in the following cases: a.

in case of a false or fraudulent return with intent to evade tax; or

b.

failure to file a return.

In case the Commissioner and the taxpayer agree in writing to a different period before the expiration of the original prescriptive period. The period so agreed upon may be extended by subsequent written agreement before the expiration of the period previously agreed upon.

When is assessment deemed made? •

It is not the issue date of the demand and/or notice that is the reckoning point in prescription but rather it is the date when the demand letter is released, mailed or sent to the taxpayer that constitutes an actual assessment.

•

The Supreme Court held in a case that so long as the release thereof is effected before prescription sets in, the assessment is deemed made on time even though the same is actually received by the taxpayer after the expiration of the prescription period. [Basilan Estates, Inc. v. Commissioner, 21 SCRA 17] The law does not require that the demand or notice be received within the prescriptive period.

Important considerations on prescription of the government’s right to assess taxes 1.

Date of filing of tax returns

2.

Effect of filing of an amended return

3.

Effect of the filing of a wrong return (as if no return filed, thus, 10-year prescriptive period)

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186 TAX REMEDIES 4.

Period applicable when the law does not require the filing of a return (10-year prescriptive period unless taxpayer files a return to enable him to avail of the benefit of the three-year prescriptive period)

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187 TAX REMEDIES Amended return •

The Supreme Court held that where the amended return is substantially different from the original return, the right of the Bureau of Internal Revenue to assess the tax is counted from the filing of the amended return. [Commisioner v. Phoenix Assurance Co., Ltd., L-19127, May 20, 1965]

False v. fraudulent return •

Distinction must be made between false returns due to mistakes, carelessness or ignorance and fraudulent returns with intent to evade taxes.

•

The fraud contemplated by law is actual and not constructive. It must amount to intentional wrong doing with the sole object of avoiding the tax. It necessarily follows that a mere mistake cannot be considered as fraudulent intent. Thus, if both the petitioner and the respondent Commissioner committed mistakes in making the entries in the returns and the assessment respectively under the inventory method of determining tax liability, it would be unfair to treat the mistakes of the petitioner as tainted with fraud and those of the respondent’s tax deficiency for each year from 1946 to 1951, inclusive. [Aznar v. Commissioner, L-20569, August 23, 1974]

Fraud •

Fraud is a question of fact and the circumstances constituting fraud must be alleged and proved.

•

Fraud must be a product of a deliberate intent to evade taxes. Hence, mere underdeclaration does not necessarily imply fraud.

•

Fraud must be actual, not constructive. It must amount to intentional wrong doing with the sole purpose of avoiding the tax. A mere mistake cannot be considered as fraudulent intent.

Waiver of the statute of limitations •

Section 222(b) of the NIRC allows the taxpayer and the government to extend by mutual agreement the prescriptive periods for the assessment and collection of taxes.

•

Such agreement must be in writing.

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The waiver must be executed by the parties before the lapse of the threeyear prescriptive period. A waiver is ineffectual if it is executed beyond the original prescriptive period.

•

The extended period may again be extended provided the new period be agreed upon before the lapse of the extended period.

Procedure for waiver of prescriptive period under RMO 20-90 1.

Waiver must be in prescribed form

2.

Waiver must be signed by the taxpayer himself or his authorized representative

3.

The Commissioner or his duly authorized agent must sign the waiver indicating the BIR’s acceptance of the waiver

COLLECTION General Rule •

Collection may be instituted within five (5) years following the assessment of the tax. [Section 222©]

Exception •

A proceeding in court for collection, without assessment, may be instituted within ten (10) years after the discovery of falsity, fraud, or omission in the case of a false or fraudulent return with intent to evade tax or failure to file a return. [Section 222(a), NIRC]

When does the three-year prescriptive period start to run? •

The period of limitation to collect is counted from the assessment of the tax.

•

Assessment is deemed made at the time the demand or assessment notice has been sent, released or mailed to the taxpayer.

•

The actual sending or release to the taxpayer of the assessment notice or demand is, therefore, necessary in order to determine the actual date when the tax being collected was assessed.

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189 TAX REMEDIES When is the tax deemed collected for purposes of the prescriptive period? •

Collection through summary remedies is effectuated by summary methods when the government avails of the distraint and levy procedure.

•

If collection is to be effected through judicial remedies, the collection of the tax is begun by the filing of the complaint with the proper court.

•

However, if the decision of the Commissioner on a protested assessment is appealed to the Court of Tax Appeals, the collection of the tax is considered begun when the government files its answer to the taxpayer’s petition for review.

May there be a judicial action to collect a tax liability even if there is no previous assessment? •

Yes. A proceeding in court for collection – without assessment – may be instituted within ten years after the discovery of falsity, fraud, or omission in the case of a false or fraudulent return with intent to evade tax or failure to file a return. [Section 222(a), NIRC]

Prescription of the government’s right to recover an erroneously refunded tax •

Same as the three-year prescriptive period for making assessments. [Guagua Electric Co., Inc. v. Commissioner, 19 SCRA 790]

Suspension of the running of the Statute of Limitations •

The running of the Statute of Limitations provided in Sections 203 and 222 on the making of assessment and the beginning of distraint or levy or a proceeding in court for collection, in respect of any deficiency, shall be suspended under any of the following circumstances: 1.

When the Commissioner is prohibited from making the assessment or beginning the distraint or levy or proceeding in court and for sixty (60) days thereafter;

2.

When the taxpayer requests for a reinvestigation which is granted by the Commissioner;

3.

When the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected, unless

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190 TAX REMEDIES the taxpayer has informed the Commissioner of any change in address; 4.

When the warrant of distraint or levy is duly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and no property could be located; and

5.

When the taxpayer is out of the Philippines.

Examples when the Commissioner is prohibited from assessing or collecting the tax 1.

The filing of a petition for review in the Court of Tax Appeals from the decision of the Commissioner on a protested assessment interrupts the running of the prescriptive period for collection. [Republic v. Ker & Co., Ltd., 18 SCRA 207]

2.

When the Court of Tax Appeals enjoins the collection of the tax under Section 11 of RA 1125.

Request for reinvestigation which should be granted or acted upon by the Commissioner •

It should be emphasized that a mere request for reinvestigation without any corresponding action on the part of the Commissioner does not interrupt the running of the prescriptive period.

Will an extrajudicial demand on the taxpayer interrupt prescription? •

No. Section 22 of the NIRC enumerates the instances when prescription is interrupted. The serving of an extrajudicial demand is not one of them.

REMEDIES

OF THE

TAXPAYER

IN GENERAL Remedies of taxpayer 1.

Remedy before payment of tax: Protest of assessment

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191 TAX REMEDIES 2.

Remedy after payment of tax: Claim for tax refund or credit

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192 TAX REMEDIES PROTEST

OF

ASSESSMENT

Procedure •

Taxpayer may protest administratively the assessment by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment.

•

Within sixty (60) days from the filing of the protest, taxpayer shall submit all relevant supporting documents, otherwise the assessment becomes final.

•

If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the decision or from the lapse of the one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable. [Section 228, NIRC]

•

Decision of the Court of Tax Appeals may be appealed to the Court of Appeals through a verified petition for review within fifteen (15) days from receipt of decision of the CTA. This may be extended for another fifteen (15) days upon proper motion and the payment of the full amount of the docket fee before the expiration of the reglementary period. No further extension shall be granted except for the most compelling reason and in no case to exceed 15 days. [Section 4, Rule 43, Rules of Court]

•

Decision of the Court of Appeals is appealable to the Supreme Court through a petition for review by certiorari within fifteen (15) days from receipt of the CA decision.

Disputed assessment •

This is an assessment which has been protested by the taxpayer. Its effect is to suspend the prescriptive period to collect the tax due.

•

Only disputed assessments are appealable to the Court of Tax Appeals. A taxpayer who received an assessment and who did not protest such assessment cannot file an appeal to the Court of Tax Appeals, as the assessment is not disputed.

Decisions of the Regional Director

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It should be noted that the Regional Director may also render decisions on protests.

•

Revenue Regulations 12-85 authorizes appeals to the Court of Tax Appeals from the decisions of the Regional Directors on administrative protest within the same thirty-day period. Section 7 of Republic Act No. 1125, however, mentions only decisions of the Commissioner.

•

Be that as it may, it is very well within the perimeter of correct procedure if the taxpayer, instead of going directly to the Court of Tax Appeals, appeals the Regional Director’s decision to the Commissioner considering that, after all, it is the Commissioner who has the final authority to decide administrative protests.

Two ways of protesting administratively 1.

Request for reconsideration: This refers to a plea for re-evaluation of an assessment on the basis of existing records without need of additional evidence. It may involve a question of fact or law or both.

2.

Request for reinvestigation: This refers to a plea for re-evaluation of an assessment on the basis of newly-discovered or additional evidence. It may also involve a question of fact or law or both.

Effect of failure of the taxpayer to file an administrative protest or to appeal the Commissioner’s decision to the Court of Tax Appeals •

The assessment becomes final and unappealable. As such, it makes the assessed tax collectible.

CLAIMS

FOR REFUND AND CREDIT OF TAXES

Refund v. credit •

These are remedies of the taxpayer after payment of the tax.

•

Both are modes of recovering taxes which are either erroneously or illegally paid to the government.

•

Tax refund takes place when there is actually a reimbursement of the tax. In tax credit, the government applies the amount determined to be reimbursable, after proper verification, against any sum that may be due and collectible from the taxpayer.

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194 TAX REMEDIES

When may claim for refund or credit be filed? 1.

When tax has been erroneously or illegally assessed or collected.

2.

When any penalty is claimed to have been collected without authority.

3.

When any sum is alleged to have been excessively or in any manner wrongfully collected. [Section 229, NIRC]

4.

Commissioner is also given the authority to refund the value of internal revenue stamps when they are returned in good condition by the purchaser and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. [Section 204, NIRC]

Nature of erroneously paid or illegally assessed or collected taxes •

There is erroneous payment of taxes when a taxpayer pays under a mistake of fact as for instance in a case where he is not aware of an existing exemption in his favor at the time the payment was made. Such payments are held to be not voluntary and, therefore, can be recovered or refunded.

•

Taxes are illegally collected when payments are made under duress.

Requisites for refund or credit 1.

A written claim for refund or credit must first be filed with the Commissioner;

2.

The claim for refund or credit must be a categorical demand for reimbursement; and

3.

It must be filed within two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment.

Note: Payment under protest is not required. Section 229 of the NIRC provides that a suit or proceeding for refund or credit may be maintained whether or not such tax, penalty, or sum has been paid under protest or duress. When payment under protest required 1.

In real property protest cases

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195 TAX REMEDIES

2.

Protest in customs cases

Why is a written claim for refund necessary? 1.

To afford the Commissioner an opportunity to correct the action of subordinate officers.

2.

To notify the government that the taxes sought to be refunded are under question and that, therefore, such notice should be borne in mind in estimating the revenue available for expenditure.

Two things to be established before refund or credit is granted 1.

There was an actual collection and receipt by the government of the tax sought to be recovered. This requires factual proof.

2.

There is legal basis for granting the refund or credit.

Procedure for refund or credit 1.

File claim in writing with the Commissioner. This is a condition precedent before one can file action with the Court of Tax Appeals for refund or credit.

2.

If claim is denied or is not acted upon by the Commissioner, the taxpayer must file an appeal to the Court of Tax Appeals within thirty (30) days after receipt of the decision of the Commissioner.

3.

Both the written claim and the appeal to the Court of Tax Appeals must be filed within the two-year prescriptive period.

The two-year prescriptive period for overpaid quarterly corporate income tax •

In the case of an overpaid quarterly income tax for corporations, the prescriptive period of two years within which a claim for refund should be filed is counted, not from the time the corporation files its quarterly income tax return and pays the tax thereon, but from the date the final, adjustment return is filed after the end of the taxable year. [Commissioner v. TMX Sales, Inc., 205 SCRA 184]

Prescriptive period for taxes withheld

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In the case of taxes withheld under the withholding tax system, the two-year prescriptive period for refunds is counted not from the date the tax is withheld and remitted to the Bureau of Internal Revenue but from the end of the taxable year.

Taxes payable in installments •

In cases of taxes which are payable in installments, the two-year prescriptive period is counted from the payment of the last installment. [Commissioner v. Palanca, 18 SCRA 496]

Suspension of the two-year prescriptive period •

The period for claiming claims for refund is suspended provided two conditions are present: 1.

There is a pending litigation between the two parties, i.e. the government and the taxpayer as to the proper tax to be paid and of the proper interpretation of the taxpayer’s charter in relation to the disputed tax; and

2.

The Commissioner in that disputed case agreed to abide by the decision of the Supreme Court as to the collection of the tax relative thereto. [Panay Electric Co. v. Collector, L-10574, May 28, 1958]

Refund without claim •

The Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously made.

Forfeiture of refund and tax credit •

A refund check or warrant which shall remain unclaimed or uncashed within five (5) years from the date said warrant or check was mailed or delivered shall be forfeited in favor of the Government and the amount thereof shall revert to the general fund.

•

A tax credit certificate which shall remain unutilized after five (5) years from the date of issue shall, unless revalidated, be considered invalid.

Equitable recoupment

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It is a principle which allows a taxpayer whose claim for refund has been barred due to prescription to recover said tax by setting off the prescribed refund against a tax that may be due and collectible from him.

•

This rule is not applicable in the Philippine jurisdiction.

Legal capacity of withholding agents to claim tax refund •

Corporate withholding agents in the Philippines of non-resident foreign corporations are entitled to claim the refund of excess withholding tax paid on income of said corporations in the Philippines.

•

The Supreme Court ruled that a withholding agent should be allowed to claim the tax refund because, under the law, it is the one who is held liable for any violation of the withholding tax law should such a violation occur. [Commissioner v. Wander Phils., Inc., G.R. No. 68378, April 15, 1988]

Interest on tax refunds •

The rule on this matter is that the government cannot be required to pay interest on taxes refunded to the taxpayer. [Sweeney v. Commissioner, L12178, August 21, 1959]

•

Exceptions 1.

When the Commissioner acted with patent arbitrariness. Arbitrariness presupposes inexcusable or obstinate disregard of legal provisions. [Commissioner v. Victorias Milling Corp., et.al., L-19667, November 29, 1966]

2.

In cases of refunds or credits made after three months from April 15 to employees for any excess of the taxes withheld, the rate of which is six percent (6%) per annum. [Section 79©, NIRC]

COURT

OF

TAX APPEALS

Law creating the CTA •

Republic Act No. 1125

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198 TAX REMEDIES Why was the CTA created? 1.

To have a centralized body well-versed in tax matters – a regular court forming part of the judicial system which could exclusively hear and determine tax cases.

2.

To prevent delay in the disposition of tax cases in view of the backlog of civil and criminal cases in the regular courts. [Ursal v. Court of Tax Appeals, 101 Phil 209]

Nature of the CTA 1.

It is a judicial, not merely an administrative, body.

2.

It is a court of special jurisdiction and, as such, can only take cognizance of such matters as are clearly within its jurisdiction.

3.

It is not governed strictly by the technical rules of evidence.

Organization, quorum and disposition of cases by the CTA •

The CTA is composed of a Presiding Judge and two Associate Judges, each of whom is appointed by the President from a list of nominees prepared by the Judicial and Bar Council. Such appointments need no confirmation.

•

Any two judges of the CTA shall constitute a quorum and the concurrence of two judges shall be necessary to promulgate any decision thereof. [Sections 1 and 2, RA 1125]

•

Cases brought before the CTA shall be decided within thirty (30) days after the submission thereof for decision, which shall be in writing, stating clearly and distinctly the facts and the law on which they are based, and signed by the judges who concurred therewith. [Section 12, RA 1125]. This requirement, however, is merely directory.

Jurisdiction of the CTA •

CTA shall exercises exclusive appellate jurisdiction to review by appeal the following: 1.

Decisions of the Commissioner of Internal Revenue involving disputed assessments; refunds of internal revenue taxes, fees or other charges; penalties imposed in relation thereto; or other matters arising under

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199 TAX REMEDIES the NIRC or other law or part of law administered by the Bureau of Internal Revenue. 2.

•

Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other money charges; seizure, detention or release of property affected; fines, forfeitures, or other penalties imposed in relation thereto; or other matters arising under the Customs Law or other law or part of law administered by the Bureau of Customs. [Section 7, RA 1125]

Jurisdiction over decisions of the Local Board of Assessment Appeals is now lodged with the Central Board of Assessment Appeals.

Necessity of decisions in order to vest the CTA with jurisdiction •

Decisions of either the Commissioner of Internal Revenue or the Commissioner of Customs is of the essence in appeal of cases to the CTA for it is axiomatic in taxation that mere assessments of the Commissioner are not appealable to the CTA. It is settled that assessments are not decisions of the Commissioner.

•

In a case, the Supreme Court held that the word “decision” in Section 7 of RA 1125 means decisions of the Commissioner on the protest of the taxpayer against the assessments. Definitely, the word does not signify the assessment itself. [Commissioner v. Villa, L-23988, January 20, 1968]

•

In much the same way that mere assessments are not appealable, rulings of the Commissioner are not likewise appealable to the CTA.

Compromise penalties and the CTA •

Collection of compromise penalties comes within the scope of Section 7 of RA 1125 which speaks of “penalties imposed in relation thereto;” and that therefore it follows that the CTA has jurisdiction thereon. [U.S. Life Insurance Co. v. Commissioner, CTA Case No. 1267, December 29, 1964]

What decision is appealable? •

When it constitutes the final action taken by him or his authorized deputies with respect to the taxpayer’s liability.

•

The appealable decision is that letter of denial where the Commissioner not only demanded payment of the amount assessed but wherein he also gave

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200 TAX REMEDIES the warning that in the even the taxpayer failed to pay the same, the Commissioner would be constrained to enforce the collection thereof by means of the remedies prescribed by law. [Surigao Electric Co. v. Court of Tax Appeals, 57 SCRA 523] •

Issuance of a warrant of distraint or levy does not constitute a denial of the protest or a final action by the Commission on the protest. [Commissioner v. Union Shipping, 85 SCRA 547]

•

However, the filing of a judicial action for collection, i.e. criminal and civil action during the pendency of an administrative protest, constitutes a denial of the protest. [Commissioner v. Union Shipping] In such a situation, the taxpayer may file an appeal with the Court of Tax Appeals.

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201 TAX REMEDIES Whose decisions are appealable? •

Decisions of the Commissioner of Internal Revenue are by statutory provision appealable to the CTA but it appears that under Revenue Regulations 12-85, decisions of the Regional Director of a revenue region in the BIR are also appealable.

•

There is a court ruling to the effect that the decisions of Regional Directors may be appealed to the CTA. [Fortalez, Jr. v. Collector, Resolution, CTA Case No. 1527, December 22, 1964]

•

Appeals in customs cases seem to be limited only to decisions of the Commissioner of Customs.

Who may appeal to the CTA? •

Any person, association or corporation affected by a decision of the Commissioner of Internal Revenue or the Collector of Customs or any Provincial or City Board of Assessment Appeals may file an appeal in the CTA.

Collection case in RTC while appeal pending in the Court of Tax Appeals •

If the Bureau of Internal Revenue, during the pendency of the appeal in the Court of Tax Appeals, files a civil action in the RTC for collection of the tax liability, the taxpayer may file a motion in the RTC for the dismissal of the case on the ground that there is no basis for collecting the tax due where the assessment thereof is still under dispute in the Court of Tax Appeals.

Tax collection not suspended during appeal •

An appeal to the CTA from a decision of the Commissioner shall not suspend the payment or collection of the tax liability of the taxpayer unless a motion to that effect shall have been presented to the CTA and granted by it on the ground that such collection jeopardizes the interest of the government and/or the taxpayer.

No injunction to restrain tax collection •

General Rule: No court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by the NIRC. [Section 218, NIRC]

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Exception: CTA may suspend or restrain the collection of the tax when, in its opinion, the collection of the tax may jeopardize the interest of the government and/or the taxpayer. [Section 11, RA 1125]

Requisites for injunction 1.

That the collection of the tax may jeopardize the interest of the government and/or the taxpayer.

2.

That the taxpayer is willing to deposit the amount equal to the taxes assessed or to file a bond amounting to not more than twice the value of the tax being assessed.

3.

That the CTA may issue an injunction only in the exercise of its appellate jurisdiction.

The thirty-day prescriptive period of appeal •

The thirty-day prescriptive period starts to run from the date the taxpayer receives the appealable decision of the Commissioner.

•

The 30-day period is jurisdictional. The failure of the taxpayer to appeal from a decision of the Commissioner on time renders the assessment final, executory and demandable.

•

Requests or motions filed by the taxpayer with the BIR for the reconsideration of the Commissioner’s decision operate to suspend the running of the prescriptive period of appeal to the CTA.

•

However, mere reiterations of previous petitions for reconsideration do not suspend the running of the prescriptive period. Pro-forma motions, which do not raise new issues, will not suspend the period.

Non-extendibility of the 30-day period through tax refunds •

Where the assessment of a disputed tax has become final and executory on account of the failure of the taxpayer to appeal within the reglementary 30day period, the assessment may no longer be disputed through the simple expedient of paying the protested tax and then by subsequently claiming it as a refund within the period of two years from date of payment.

Interlocutory orders

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Interlocutory orders of the CTA are not appealable.

Appeal from decisions of the CTA •

One motion for reconsideration may be allowed for decisions of the CTA.

•

Decisions of the CTA are appealed to the Court of Appeals through a verified petition for review. [Sections 1 and 5, Rule 43, Rules of Court]

•

Appeals period is fifteen (15) days from receipt of the decision or judgment. The Court of Appeals may grant an additional period of fifteen (15) days only within which to the file the petition for review. No further extension shall be granted except for the most compelling reasons and in no case to exceed fifteen (15) days. [Section 4, Rule 43, Rules of Court]

Findings of fact of CTA not reviewable •

Findings of fact of the CTA, when supported by substantial evidence, is final.

Damages in CTA proceedings •

Section 16 of RA 1125 provides that “where an appeal is found to be frivolous or that proceedings have been instituted merely for delay, the CTA may assess damages against the appellant in an amount not exceeding P500 which shall be collected in the same manner as fine or other penalties authorized by law.”

REMEDIES

OF THE

GOVERNMENT

IN GENERAL Remedies of the government 1.

Tax lien

2.

Compromise

3.

Distraint

4.

Levy

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204 TAX REMEDIES

5.

Civil action

6.

Criminal action

7.

Forfeiture

8.

Suspension of business operations in violations of VAT

9.

Enforcement of administrative fine

TAX LIEN Tax lien •

When a taxpayer neglects or refuses to pay his internal revenue tax liability after demand, the amount so demanded shall be a lien in favor of the government from the time the assessment was made by the Commissioner until paid with interest, penalties, and costs that may accrue in addition thereto, upon all property and rights to property belonging to the taxpayer. [Section 219, NIRC]

•

Lien shall not be valid against any mortgagee, purchaser or judgment creditor until notice of such lien shall be filed by the Commissioner in the Register of Deeds of the province or city where the property of the taxpayer is located.

COMPROMISE Compromise v. abatement •

Unlike compromise which involves a reduction of the taxpayer’s liability, abatement of tax means that the entire tax liability of the taxpayer is cancelled.

•

Compromise and abatement have different grounds.

Grounds for compromise 1.

A reasonable doubt as to the validity of the claim against the taxpayer exists; or

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205 TAX REMEDIES 2.

The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax.

Grounds for abatement 1.

When the tax or any portion thereof appears to be unjustly or excessively assessed.

2.

When the administration and collection costs involved do not justify the collection of the amount due.

Compromise of criminal violations •

All criminal violations may be compromised except: 1.

those already filed in court; and

2.

those involving fraud.

Limitations on compromise •

For cases of financial incapacity, a minimum compromise rate equivalent to 10% of the basic assessed tax; and

•

For other cases, a minimum compromise rate equivalent to 40% of the basic assessed tax.

•

Where the basic tax exceeds one million pesos (P1,000,000) or where the settlement offered is less than the prescribed minimum rates, the compromise shall be subject to the approval of the Evaluation Board which shall be composed of the Commissioner and the four Deputy Commissioners.

Delegation of the power of compromise •

The Commissioner may delegate his power to compromise to the Deputy Commissioners and the Regional Directors subject to such limitations and restrictions as may be imposed under rules and regulations to be promulgated for the purpose.

DISTRAINT

AND

LEVY

Collection by distraint and levy

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Both are summary administrative enforcement remedies and cannot be availed of where the amount of tax involved is not more than P100.

•

Distraint is enforced on personal property of the taxpayer while levy is enforced on real property.

•

In distraint, forfeiture by the government is not provided, while in levy, forfeiture is authorized.

•

The taxpayer is not given the right of redemption with respect to distrained personal property, while such right is granted in case of real property levied upon and sold, or forfeited, to the government.

•

Levy may be made before, simultaneously or after distraint.

Actual v. constructive distraint •

Actual distraint is resorted to when delinquency in the payment sets in, that is, when at the time required for payment, a person fails to pay his tax obligation. It consists of actual seizure and distraint of personal property of the taxpayer.

•

In constructive distraint, no actual delinquency is necessary before it may be resorted to. It may be availed of in the following instances: a) Taxpayer is retiring from business subject to tax; b) He intends to leave the Philippines; c) He removes his property therefrom; d) He hides or conceals his property; or e) He performs any act tending to obstruct the proceedings for collecting the tax due or which may be due from him. In addition, constructive distraint may also be resorted to when the taxpayer is already delinquent.

•

Constructive distraint is a preventive remedy whose aim is to forestall a possible dissipation of the taxpayer’s asset when delinquency takes place.

•

There are different procedures in enforcing actual and constructive distraint.

How to effect constructive distraint? •

It shall be effected by requiring the taxpayer or any person having possession or control of such property to sign a receipt covering the property distrained and obligate himself to preserve the same intact and unaltered and not to dispose of the same in any manner whatever without the express authority of the Commissioner.

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If the taxpayer or any other person refuses or fails to sign the receipt, the revenue officer effecting the constructive distraint shall proceed to prepare a list of such property and, in the presence of two witnesses, leave a copy thereof in the premises where the property distrained is located, after which the said property shall be deemed to have been placed under constructive distraint.

Procedure for actual distraint 1.

Commencement of distraint proceedings

2.

Service of warrant of distraint

3.

Notice of sale of distrained property

4.

Sale of property distrained

Manner of serving warrant of distraint 1.

Goods, chattels, effects or other personal property The officer serving the warrant of distraint shall make or cause to be made an account of the goods, chattels, effects or other personal property distrained, signed by himself, which includes a statement of the sum demanded and note of the time and place of the sale. A copy shall be left either with the owner or person from whose possession such goods, chattels, or effects or other personal property were taken, or at the dwelling of business of such person and with someone of suitable age and discretion.

2.

Stocks and other securities Stocks and other securities shall be distrained by serving a copy of the warrant of distraint upon the taxpayer and upon the president, manager, treasurer or other responsible officer of the corporation, company or association, which issued the said stocks or securities.

3.

Debts and credits Debts and credits shall be distrained by leaving with the person owing the debts or having in his possession or under his control such credits, or with his agent, a copy of the warrant of distraint.

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208 TAX REMEDIES

The warrant of distraint shall be sufficient authority to the person owing the debts or having in his possession or under his control any credits belonging to the taxpayer to pay to the Commissioner the amount of such debts or credits. 4.

Bank accounts Bank accounts shall be garnished by serving a warrant of garnishment upon the taxpayer and upon the president, manager, treasurer or other responsible officer of the bank. Upon receipt of the warrant of garnishment, the bank shall turn over to the Commissioner so much of the bank accounts as may be sufficient to satisfy the claim of the Government.

Purchase by government at sale upon distraint •

•

The Commissioner or his deputy may purchase the property distrained in behalf of the National Government when: 1.

the amount bid for the property under distraint is not equal to the amount of the tax; or

2.

the amount is very much less than the actual market value of the articles offered for sale.

Property so purchased may be resold by the Commissioner or his deputy.

Procedure on levy of real property 1.

Service of warrant of levy

2.

Advertisement of the sale

3.

Public sale of the property under levy or forfeiture of the property to the government for want of bidder

4.

Redemption of property or consolidation of ownership and title in the purchaser

How to effect levy?

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Internal revenue officer shall prepare a duly authenticated certificate showing the name of the taxpayer and the amount of the tax and penalty due from him.

•

Such certificate shall operate with the force of a legal execution throughout the Philippines.

•

Levy shall be effected by writing upon said certificate a description of the property upon which levy is made. At the same time, written notice of the levy shall be mailed to or served upon the Register of Deeds of the province or city where the property is located and upon the delinquent taxpayer, or if he is absent from the Philippines, to his agent or manager, or to the occupant of the property in question.

Advertisement of sale •

Posting a notice of sale at least 30 days at the main entrance of the municipal or city hall and in a public and conspicuous place in the city or municipality where the property is located

•

Publication once a week for three weeks in a newspaper of general circulation in the municipality or city where the property is located

Redemption of real property sold •

Delinquent taxpayer have the right to redeem the real property sold by him or any one for him within one (1) year from the date of sale.

•

Taxpayer must pay the amount of public taxes, penalties, and interest from the date of delinquency to the date of sale, together with interest on said purchase price at the rate of 15% per annum from the date of purchase to the date of redemption.

•

The owner shall not, however, be deprived of the possession of the said property and shall be entitled to the rents and other income thereof until the expiration of the time allowed for its redemption.

Forfeiture to government for want of bidder in sale of real property •

Internal revenue officer conducting the sale of real property levied shall declare the property forfeited to the Government in satisfaction of the claim when:

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210 TAX REMEDIES 1.

there is no bidder for real property exposed for sale; or

2.

the highest bid is for an amount insufficient to pay the taxes, penalties and costs.

Resale of real estate taken for taxes •

The Commissioner shall have charge of any real estate obtained by the Government in payment or satisfaction of taxes, penalties or costs arising under the NIRC or in compromise or adjustment of any claim thereof.

•

The Commissioner may, upon giving not less than 20 days notice, sell and dispose of the said property at public auction or, with the prior approval of the Secretary of Finance, dispose of the same at private sale.

FORFEITURE Forfeiture •

The effect of forfeiture is to transfer the title to the specific thing from the owner to the government.

•

In case of personal property: The forfeiture of chattels and removable fixtures of any sort is enforced by seizure and sale or destruction of the specific forfeited property.

•

In case of real property: The forfeiture of real property is enforced by a judgment of condemnation and sale in a legal action or proceeding, civil or criminal, as the case may require.

Forfeiture of property used in unlicensed business or dies used for printing false stamps, etc. •

All chattels, machinery, and removable fixtures of any sort used in the unlicensed production of articles subject to excise tax shall be forfeited.

•

Dies and other equipment used for the printing or making of any internal revenue stamp, label or tag which is in imitation of or purports to be a lawful stamp, label or tag shall also be forfeited.

Forfeiture of goods illegally stored or removed

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Unless otherwise specifically authorized by the Commissioner, all articles subject to excise tax should not be stored or allowed to remain in a distillery, distillery warehouse, bonded warehouse or other place where made, after the tax thereon has been paid; otherwise, all such articles shall be forfeited.

•

Articles withdrawn from any such place or from customs custody or imported into the country without the payment of the required tax shall likewise be forfeited.

CIVIL

AND

CRIMINAL ACTIONS

Civil and criminal actions •

Civil and criminal actions and proceedings instituted in behalf of the Government under the authority of the NIRC or other law enforced by the Bureau of Internal Revenue shall be brought in the name of the Government of the Philippines and shall be conducted by legal officers of the Bureau of Internal Revenue, but no civil or criminal action for the recovery of taxes or the enforcement of any fine, penalty or forfeiture under this Code shall be filed in court without the approval of the Commissioner. [Section 220, NIRC]

•

In a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof.

Civil action •

Civil action, as a mode of tax collection, is resorted to when a tax liability becomes collectible.

•

Collectibility of a tax arises in the following instances:

•

1.

When a tax is assessed but the assessment becomes final and unappealable because the taxpayer fails to file an administrative protest.

2.

When a protest against the assessment is filed by the taxpayer and a decision is rendered by the Commissioner but said decision becomes final, executory and demandable for failure of the taxpayer to file an appeal.

A civil action may also be filed in order to collect the so-called self assessed tax.

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212 TAX REMEDIES

•

No civil action for the recovery of taxes shall be filed without the approval of the Commissioner.

Insufficient protest allowing collection case •

In Dayrit v. Cruz [L-39910, September 26, 1988], the Supreme Court ruled that the request for reconsideration cannot be considered as a protest against the assessment. According to the Supreme Court, the failure of the heirs to substantiate their claim against the assessment due to the nonsubmission of their position paper justified the Commissioner in collecting the estate and inheritance taxes in the settlement proceedings.

•

In Republic v. Ledesma [L-19759, February 28, 1969], the Supreme Court held that the taxpayer’s failure to dispute the assessment effectively by complying with the conditions laid down by the Bureau of Internal Revenue provided a legal basis for the government to collect the taxpayer’s liability by ordinary civil action.

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213 TAX REMEDIES Is Commissioner required to rule on a pending protest before filing a collection case? •

No. In Republic v. Liam Tian Teng Sons, Inc. [16 SCRA 584(1966)], the Supreme Court held that nowhere in the Tax Code is the Commissioner required to rule first on a taxpayer’s request for reinvestigation before he can go to court for the purpose of collecting the tax assessed. According to the Supreme Court, the legislative policy is to give the Commissioner much latitude in the speedy and prompt collection of taxes because it is on taxation that the government depends to obtain the means to carry out its operations.

•

Note however that a civil or criminal case is tantamount to a denial of the request for reinvestigation. Thus, the taxpayer may file an appeal with the Court of Tax Appeals. [Commissioner v. Union Shipping]

Criminal action •

The filing of a criminal action is one of the recognized modes of collecting delinquent taxes. Section 105 of the NIRC further states that the judgment in the criminal case shall not only impose the penalty but shall also order payment of the taxes subject of the criminal case as finally decided by the Commissioner.

•

Criminal action is, however, not resorted to as a collection remedy only. There are other cases not involving non-payment of taxes where criminal action is utilized.

Important considerations regarding criminal action 1.

No criminal action for the recovery of taxes or the enforcement of a fine shall be filed in court without the approval of the Commissioner. [Section 220, NIRC]

2.

Criminal actions instituted in behalf of the government under the authority of the NIRC or other law enforced by the Bureau of Internal Revenue shall be brought in the name of the government and shall be conducted by legal officers of the Bureau of Internal Revenue. [Section 220, NIRC]

3.

The acquittal of the taxpayer in a criminal action does not necessarily result in the exoneration of said taxpayer from his civil liability to pay taxes.

4.

In a criminal action that was instituted against the taxpayer for having filed a false and fraudulent return and failure to pay taxes, the Supreme Court held

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214 TAX REMEDIES that the subsequent satisfaction of the tax liability by payment or prescription will not operate to extinguish the taxpayer’s criminal liability. Payment of the tax due after apprehension shall not constitute a valid defense in any prosecution for violation of any provision of the NIRC or in any action for forfeiture of untaxed articles. [Section 253, NIRC] 5.

Subsidiary imprisonment is provided for in cases of non-payment of the fine due to the taxpayer’s insolvency but not for failure to pay the tax due to the taxpayer’s insolvency. Section 280 provides that: “If the person convicted for violation of any provisions of this Code has no property with which to meet the fine imposed upon him by the court, or is unable to pay such fine, he shall be subject to a subsidiary personal liability.”

6.

In Ungab v. Cusi, the Supreme Court held that no assessment is required before a criminal prosecution. This was modified in a later case, Commissioner v. Court of Appeals, where the Supreme Court ruled that assessment is necessary before the criminal prosecution of Fortune Tobacco. The Supreme Court, however, harmonized this decision with the earlier one. [See later discussion]

7.

In cases of violations committed by associations, partnerships, or corporations, the penalty shall be imposed on the partner, president, general manager, branch manager, treasurer, officer-in-charge, and employees responsible for the violation.

Civil liability in tax criminal cases •

In ordinary criminal cases, the civil liability is incurred by reason of the offender’s criminal act.

•

In taxation, the civil liability to pay taxes arises not because of any felony but upon the taxpayer’s failure to pay taxes. Criminal liability in taxation arises as a result of one’s liability to pay his taxes. Consequently, the extinction of one’s criminal liability does not necessarily result in the extinguishments of his civil liability to pay taxes.

•

“With regard to the tax proper, the state correctly points out in its brief that the acquittal in the criminal case could not operate to discharge the petitioner from the duty to pay the tax since that duty is imposed by statute prior to and independent of any attempts on the part of the taxpayer to

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215 TAX REMEDIES evade payment. The obligation to pay the tax is not a mere consequence of the felonious acts charged in the information, nor is it a mere civil liability derived from crime that would be wiped out by the judicial declaration that the criminal acts charged did not exist.” [Castro v. Collector, 4 SCRA 1093]

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216 TAX REMEDIES Need for assessment before criminal action Ungab v. Cusi [L-41919-24, May 30,1980} •

Quirico Ungab filed a motion to quash the criminal complaints against him in view of his pending protest against the assessment made by the Bureau of Internal Revenue. The Supreme Court ruled that his contention is without merit. What is involved here is not the collection of taxes where the assessment of the Commissioner may be reviewed by the Court of Tax Appeals but a criminal prosecution for violation of the NIRC which is within the cognizance of the Court of First Instance (now RTC).

•

While there can be no civil action to enforce collection before the assessment procedures in the NIRC have been followed, there is no requirement for the precise computation of the tax before there can be criminal prosecution under the NIRC.

•

A crime is complete when the violator has knowingly and willfully filed a fraudulent return with intent to evade and defeat the tax.

Commissioner of Internal Revenue v. Court of Appeals (1997) •

Assessment required before criminal prosecution of Fortune for tax evasion can be pursued.

•

The Supreme Court differentiated this case from Ungab v. Cusi by ruling that, even though this is also a criminal prosecution, there must be a prima facie showing of a willful attempt to evade taxes before one can proceed with such prosecution. In Ungab, there was willful attempt to evade taxes while, in the case at bar, there was none, as Fortune was even paying taxes according to the BIR requirements. Thus, there is still need for a final determination of the tax due before criminal prosecution can be commenced against Fortune.

ADDITIONS

TO THE

TAX

Additions to the tax

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Additions to the tax are increments to the basic tax incident to the taxpayer’s non-compliance with certain legal requirements like the taxpayer’s refusal or failure to pay taxes on time and/or violations of taxing provisions in the law.

What are the additions to the tax? 1.

Civil penalty or surcharge

2.

Interest

3.

Other civil penalties and administrative fines

Civil penalty or surcharge •

The civil penalty or surcharge may either be 25% or 50% of the tax depending on the nature of the violation.

•

The payment of the surcharge is mandatory and the Commissioner is not vested with any authority to waive or dispense with the collection thereof.

•

An extension of time to pay taxes granted by the Commissioner does not excuse payment of the surcharge.

•

The 50% surcharge is not a criminal penalty but a civil or administrative sanction provided primarily as a safeguard for the protection of the State revenue and to reimburse the government for the heavy expense of investigation and the loss resulting from the taxpayer’s fraud.

Cases where the civil penalties or surcharges are imposed 1.

25% a.

Failure to file any return and to pay the tax due thereon as required by the NIRC or rules

b.

Filing a return with an internal revenue officer other than those with whom the return is required to be filed.

c.

Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment.

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218 TAX REMEDIES d.

2.

Failure to pay the full or part of the amount of tax shown on any return, or the full amount of tax due for which no return is required to be filed, on or before the date prescribed for its payment.

50% a.

In case of willful neglect to file the return within the period prescribed by the NIRC or rules

b.

In case a false or fraudulent return is willfully made

Substantial underdeclaration or overdeclaration •

A substantial underdeclaration of taxable sales, receipts or income, or a substantial overstatement of deductions shall constitute prima facie evidence of a false or fraudulent return.

•

Failure to report sales, receipts or income in an amount exceeding 30% of that declared per return and a claim of deductions in an amount exceeding 30% of actual deductions shall render the taxpayer liable for substantial underdeclaration of sales, receipts or income or for overstatement of the deductions.

Interest •

This is an increment on any unpaid amount of tax assessed at the rate of 20% per annum or such higher rate as may be prescribed by the regulations from the date prescribed for payment until the amount is fully paid.

Classes of interest 1.

Deficiency interest

2.

Delinquency interest

3.

Interest on extended payment

Deficiency interest •

Any deficiency in the tax due shall be subject to the interest of 20% per annum which shall be assessed and collected from the date prescribed for its payment until the full payment thereof.

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219 TAX REMEDIES When delinquency interest imposed? •

•

Delinquency interest is imposed in case of failure to pay: 1.

The amount of the tax due on any return required to be filed; or

2.

The amount of tax due for which no return is required; or

3.

A deficiency tax or any surcharge or interest thereon on the due date appearing in the notice and demand of the Commissioner.

Rate is 20% per annum until the amount is fully paid which interest shall form part of the tax.

Interest on extended payment •

This is imposed when taxpayer has opted to pay by installment but he fails to pay the tax or any installment on the prescribed date for payment.

•

It is also imposed where Commissioner has authorized the extension of the time for payment of the tax.

Administrative fines or penalties 1.

Failure to file certain information returns

2.

Failure of a withholding agent to collect and remit the tax

3.

Failure of a withholding agent to refund excess withholding tax

STATUTORY OFFENSES

AND THEIR

PENALTIES

General points re. crimes and offenses •

Any person convicted of a crime penalized by the NIRC shall, in addition to being liable for the payment of the tax, be subject to the penalties imposed in the Code.

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Payment of the tax due after apprehension shall not constitute a valid defense in any prosecution for violation of any provision of the NIRC or in any action for the forfeiture of untaxed articles.

•

Any person who willfully aids or abets in the commission of a crime penalized in the NIRC or who causes the commission of any such offense by another shall be liable in the same manner as the principal.

•

If the offender is not a Filipino citizen, he shall be deported immediately after serving the sentence without further proceeding for deportation.

•

If the offender is a public officer or employee, the maximum penalty prescribed for the offense shall be imposed and, in addition, he shall be dismissed from the public service and perpetually disqualified from holding any public office, to vote and to participate in any election.

•

If the offender is a Certified Public Accountant, his certificate as a CPA shall, upon conviction, be automatically revoked or cancelled.

•

In the case of associations, partnerships or corporations, the penalty shall be imposed on the partner, president, general manager, branch manager, treasurer, officer-in-charge, and employees responsible for the violation.

Give examples of crimes and offenses 1.

Attempt to evade or defeat tax Any person who willfully attempts in any manner to evade or defeat any tax imposed under the NIRC or the payment thereof.

2.

Failure to file return, supply correct and accurate information, pay tax, withhold and remit tax and refund excess taxes withheld on compensation

3.

Unlawful pursuit of business Any person who carries on any business for which an annual registration fee is imposed without paying the tax as required by law.

4.

Unlawful possession or removal of articles subject to excise tax without payment of the tax

5.

Failure or refusal to issue receipts or sales or commercial invoices, violations related to the printing of such receipts or invoices and other violations

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221 TAX REMEDIES

Prescription for violations of any provision of the NIRC •

All violations of any provision of the NIRC shall prescribe after five (5) years.

•

Prescription shall begin to run from the day of the commission of the violation of the law, and if the same be not known at the time, from the discovery thereof and the institution of judicial proceedings for its investigation and punishment.

•

The prescription shall be interrupted when proceedings are instituted against the guilty persons and shall begin to run again if the proceedings are dismissed for reasons not constituting jeopardy.

•

The term of prescription shall not run when the offender is absent from the Philippines.

When is informer’s reward given? •

An informer’s reward is given to persons instrumental in the: 1.

discovery of violations of the NIRC; and

2.

discovery and seizure of smuggled goods.

Requisites for informer’s reward for violations of the NIRC •

This may be claimed by any person, except an internal revenue official or employee, or other public official or employee, or his relatives within the sixth degree of consanguinity.

•

Person voluntarily gives definite and sworn information, not yet in the possession of the Bureau of Internal Revenue. Information should not refer to a case already pending or previously investigated or examined by the Commissioner or any of his agents.

•

Information leads to the discovery of frauds upon the internal revenue laws or violations of any of the provisions thereof.

•

There is recovery of revenues, surcharges and fees and/or the conviction of the guilty party and/or the imposition of any fine or penalty. In the reverse, if no revenue, surcharges or fees be actually recovered or collected, such person shall not be entitled to a reward.

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222 TAX REMEDIES

•

Reward shall be equivalent to ten percent (10%) of the revenues, surcharges or fees recovered and/or any fine or penalty imposed and collected or P1,000,000 per case, whichever is lower.

•

The same amount of reward shall be also given to an information where the offender has offered to compromise the violation of law committed by him and his offer has been accepted by the Commissioner and collected from the offender.

Discovery and seizure of smuggled goods •

To encourage the public to extend full cooperation in eradicating smuggling, a cash reward equivalent to 10% of the fair market value of the smuggled and confiscated goods or P1,000,000 per case, whichever is lower.

Reward subject to income tax •

The cash rewards of informers shall be subject to income tax collected as a final withholding tax, at the rate of ten percent (10%).

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Tax Remedies

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