The emerging concept of tax estoppel and the age-old principle of due process

As featured on PhilStar:   Tax estoppels and due process

The concept of Estoppel is codified in the Philippine Civil Code. However, the Supreme Court, in a case, so eloquently described how estoppel occurs as “when one, by his acts, representations, or admissions, or by his silence when he ought to speak out, intentionally or through culpable negligence induces another to believe certain facts to exist and such other rightfully relies and acts on such belief so that he will be prejudiced if the former is permitted to deny the existence of such facts” (G.R. No. 66715 dated 18 September 1990).

In certain jurisdictions abroad, the concept of Tax Estoppel is established in case law. Under this principle, a litigant shall be unsuccessful in taking a position that is incompatible with tax returns and disclosures signed by the taxpayer. This concept, although not indoctrinated in Philippine tax jurisprudence to date, may be gleaned from various issuances of the Bureau of Internal Revenue (BIR).  For instance, Revenue Memorandum Order (RMO) No. 17-06 provides for the policies and procedures for the centralized processing and issuance of Return Processing System (RPS) assessment notices arising from tax return information discrepancies, late filing of tax returns or non-payment/underpayment of taxes. RPS assessment notices are different from assessment notices issued arising from regular audit/investigation of returns. According to this issuance, the RPS assessment notices are issued pursuant to Section 228 of the Tax Code in which no prior notice (e.g. preliminary assessment notice or PAN) is required before the final assessment can be issued. In RMO No. 11-2014, any unpaid amount of tax due from a taxpayer who failed to pay the same from a self-assessed tax liability within the time prescribed for its payment is considered as accounts receivable or delinquent accounts which may be subject to the BIR’s collection enforcement remedies.

The concept of an RPS assessment was recently cited in Revenue Memorandum Circular (RMC) No. 7-2023 dated 10 January 2023 which is entitled “Clarification on the Return Processing System (RPS) Assessment being issued by the Bureau of Internal Revenue”. Salient provisions of the issuance are as follows:

• An RPS assessment arises when the RPS system detects a tax return that was filed late but no penalties were paid, a tax return filed with declared tax due but no corresponding payment was detected, or a tax return filed with tax due but the payment detected was only partial.
• The RPS assessments, according to this RMC, are not tax assessments arising from the conduct of an audit/investigation of the taxpayer's books of accounts and other relevant records. These are based on a taxpayer's own disclosures and when left unpaid within the prescribed due date, these become delinquent accounts pursuant to RMO No. 11-2014. Thus, to effect collection thereof, the BIR can enforce civil or criminal actions as provided in the Tax Code, as amended.
• The RMO explicitly states that the sending of an RPS Assessment should not be likened to an Assessment Notice arising from an audit where a taxpayer has the chance to contest or protest. The RMO further provides that since no examination of books or accounting records is being conducted, the issuance of a Letter of Authority (LOA) shall not be required for the issuance of an RPS Assessment. The RMO states that the RPS Assessment is a Collection Letter and sending thereof is a civil/administrative remedy of the BIR.

The concept of an RPS assessment is quite perplexing. While it can be characterized as a Collection Letter of possible payment lapses or deficiency tax payments pursuant to a taxpayer’s declaration per return, the issuance of an RPS assessment requires several levels of verification on the part of the BIR per RMO No 17-06. One may ask, can this process, including the verification of RPS assessments, be considered as an examination of a taxpayer’s accounting records to assess the correct amount of tax under powers vested with the Commissioner of Internal Revenue (CIR) which the latter may delegate through an LOA to other officials of the BIR?  We also hope that the BIR can clarify this issuance further and include provisions on how taxpayers can raise questions or defenses on an RPS assessment. Section 228 of the Tax Code, as amended, (where an RPS assessment is allegedly based) only provides for instances where the issuance of a PAN can be done away with. Thus, considering that an RPS could be akin to a Final Assessment Notice (FAN), can the RPS Assessment be administratively protested by filing a request for reconsideration or reinvestigation?

As in all other legal disputes, the due process rights of all parties, especially those of the taxpayer must be respected. The right to present supporting arguments and documents must be granted even to taxpayers who have received an RPS assessment. While the BIR may resort to remedies, the due process rights of taxpayers must always be respected in its attempts to enforce its right to collect and assess taxes.