It is undeniable that the COVID-19 pandemic has had devastating repercussions for our country, not only in terms of its effects to the healthcare industry, but also in financial and economic terms. This is quite alarming, given that the Philippines has contracted numerous high value loans these past few months. This being the case, we ask ourselves, “apart from loans, how can we raise funds quickly to help rebuild our economy?”
The collection of taxes may rightly be the first thing that comes to mind. However, it is to be remembered that many businesses have already closed and those that have survived are only just starting to mend from the economic downturn brought about by the pandemic; thus, collections from current taxes may not be enough. With this, it may come as no surprise that the Bureau of Internal Revenue (BIR) has become more aggressive in pursuing the collection of deficiency taxes through tax assessments.
Tax assessments assigned to a Revenue Officer (RO) should always be authorized by the Commissioner of Internal Revenue (CIR) or his duly authorized representative through the issuance of a Letter of Authority (LOA). This is pursuant to Section 13 of the 1997 National Internal Revenue Code (NIRC), as amended, which provides that a Revenue Officer should be equipped with a valid LOA prior to the examination of a taxpayer or recommendation for an assessment of deficiency tax due. This requirement was further emphasized in the Supreme Court’s (SC) decision in GR No. 178697 (CIR vs. Sony Philippines, Inc. dated 17 November 2010) where the SC ruled that absence of any prior authority on the part of the ROs who conducted the audit/examination of taxpayer’s books of account and other accounting records will make the deficiency tax assessment arising therefrom null and void.
However, a point of contention arises when a tax investigation case is reassigned to another RO – is it mandatory that a new LOA be issued to authorize the newly appointed RO to continue carrying on such investigation?
This was the subject of the recent decision made by the Court of Tax Appeals (CTA) in CTA Case No. 9029 (First Life Financial Co., Inc. vs CIR dated 04 December 2019). In the instant case, a LOA dated 01 July 2008 was issued by the Head Revenue Executive Assistant of LTS-Regular Large Taxpayers to authorize a RO to examine the petitioner’s books of accounts and other accounting records. However, the audit and investigation of petitioner’s accounting records was later reassigned to a new RO as evidenced by a Memorandum of Assignment (MOA) dated 25 February 2013 issued by the Chief of Regular LT Audit Division. The new RO, by virtue of the MOA appointing her, then continued the audit/investigation and subsequently issued a Preliminary Assessment Notice (PAN) dated 20 May 2013. On 27 August 2014, petitioner received a Final Decision on Disputed Assessment (FDDA) declaring it liable for alleged deficiency taxes for taxable year 2007. Subsequently, on 14 April 2015, First Life Financial Co. Inc. filed a petition for review with the CTA seeking to set aside the FDDA.
In view of the foregoing facts, the CTA ruled the assessment void due to lack of authority on the part of the new RO to continue the audit/investigations of petitioner’s possible tax liabilities. The BIR was not able to comply with the provisions of Revenue Memorandum Order (RMO) No. 43-90, which explicitly provides that all audits/investigations should be conducted under a LOA and that any reassignment/transfer of cases to another RO shall require the issuance of a new LOA. Further, the CTA also noted that the position Chief of Regular LT Audit Division 1 does not grant sufficient authority to such designated person to represent the CIR. Based on this, CTA asserted that the Chief of Regular LT Audit Division is without the power to authorize the issuance of an LOA or to affect any modification or amendment to a previously issued LOA.
The respondent CIR then filed a Motion for Reconsideration arguing that prior to the enactment of the 1997 NIRC, the issuance of a LOA was not a statutory requirement and was then merely an administrative tool for audit activities under audit program. As such, respondent claimed that the Court’s reliance on the provisions of RMO No. 43-90 which was promulgated more than seven years prior to the law it supposedly implemented, is a repugnant error. However, the CTA disagreed and ruled that the reliance with RMO No. 43-90 is valid as the fact still remains, since the prescribed guidelines therein have not yet been repealed or revoked by any of the recent issuances of the BIR. The Motion was thus denied for lack of merit.
It is worth noting from the above that the CIR argued that the issuance of a LOA is not a statutory requirement as it was merely an internal procedure. However, this is clearly in contrast with the ruling mentioned in the Sony case and Section 13 of the 1997 NIRC, which requires the RO to be equipped with a valid LOA to conduct an audit/investigation.
Meanwhile, it should be remembered that CTA decisions are merely persuasive and does not form a valid interpretation of the Law as the same are still subject to review and may either be affirmed or denied by the SC. Furthermore, we understand that the CIR may pursue an appeal on the CTA’s decision with the CTA En Banc.
In conclusion, the case at hand illustrates how important it is to carefully follow the mandated procedures, as one misstep could put all the hard work and potential tax collections down the drain. While we do recognize that taxes could help the economy, due process thereof should not be ignored.
James Bernald B. Ayad is an Associate from the Tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.
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 ph-inquiry@kpmg.com or rgmanabat@kpmg.com.