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In the intricate relationship between economic growth and fiscal responsibility, the Bureau of Internal Revenue (BIR or the Bureau) serves as the guardian of fiscal regulations, ensuring that businesses adhere to the Tax Code, as well as to the relevant tax rules and regulations. The Bureau is armed to take decisive actions by imposing sanctions in the form of administrative, civil, and criminal penalties as provided in the Tax Code, for when businesses fail to comply with tax regulations. The Bureau recently wielded its authority to order the temporary closure of businesses, as derived from Section 115 of the Tax Code and as implemented by Revenue Memorandum Order (RMO) No. 03-2009.

Section 115 of the Tax Code vests the Commissioner of Internal Revenue (CIR or the Commissioner), or his authorized representative, the power to suspend the business operations and temporarily close the business establishment of any person for any of the following violations committed by a VAT-registered taxpayer: 1) failure to issue receipts or invoices; 2) failure to file a value-added tax return as required under Section 114; 3) understatement of taxable sales or receipts by thirty percent (30%) or more of his correct taxable sales or receipts for the taxable quarter; or 4) failure of any person to register as a taxpayer as required under Section 236.

In a nationwide padlocking of over a hundred branches of a popular chain store, the Bureau executed closure orders due to alleged use by these stores of unregistered or tampered point of sales (POS) machines, resulting to underreported sales and significantly decreased tax liabilities. Test-buys conducted on surveillance revealed the understatement of the sales being captured by the POS machines.

It is crucial to highlight that the closure of a business by the Bureau is not arbitrary. Before resorting to such drastic actions, the Bureau follows a structured process, typically issuing multiple warnings/notices, conducting thorough audits and surveillance, and providing ample opportunities for businesses to rectify any violations. Prior to ordering the temporary closure of businesses, RMO No. 03-2009 provides guidelines on the conduct of surveillance and the procedures done by the implementing officers to check for compliance. As part of overt surveillance, implementing officers, who must be armed with valid Mission Orders (MO), conduct inspections of the cash register machines (CRM) and POS machines to determine proper BIR registration and integrity of the machines.

RMO No. 03-2009 also provides the procedures for recommending the suspension or temporary closure of businesses which commit violations stated in Section 115 of the Tax Code. Documentary and confrontational requirements, properly considered by the appropriate Reviewing Board as provided in the RMO, must support the recommendation to issue a closure order. As part of due process, the taxpayer is informed of the findings of the investigating office through the service of a five-day VAT Compliance Notice (VCN). The five-day VCN likewise states the particular provision/s of the Tax Code that was/were violated, and for which rectification must be done, including payment of the required deficiency taxes and penalties due therefor. Prior to the issuance of a closure order, the taxpayer is given the opportunity to explain and/or refute the findings of the BIR within 2 days from the receipt of the VCN.

In the event that the taxpayer 1) refuses, neglects, or fails to timely respond to the VCN; or 2) submits a response later found insufficient; or 3) refuses, neglects, or fails to comply with the terms of the VCN, the concerned Reviewing Board shall prepare a memorandum report containing a Closure Order (CO) recommending the closure of the establishment for the approval and signature of the CIR. The signed CO, approved memorandum report, together with the supporting documents, shall be served to the non-compliant taxpayer immediately. However, interim rectification by the taxpayer shall stop the implementation of the CO. The execution of the CO consists in the physical closing of the doors or other means of ingress of the establishment, and the sealing thereof, with the appropriate security devices (padlocks, etc.) and the BIR’s official seal.

Under Section 115 of the Tax Code, the closure of the establishment shall be temporary, the duration of which shall not be less than five (5) days. The temporary suspension of business operations and closure shall be lifted only upon compliance with whatever requirements prescribed by the Commissioner in the closure order. RMO No. 03-2009 further provides the procedures and terms for lifting the CO. To warrant the lifting of the CO, the taxpayer must show compliance depending on the violation to be rectified. For example, the CO shall be lifted in case payment of deficiency taxes inclusive of penalties corresponding to the understatement of taxable sales or receipts has been made by the taxpayer.

The closure of businesses due to tax violations sends a strong message about the government’s commitment to fiscal responsibility. While the immediate impact may be felt by the businesses directly affected, the long-term effect is a more robust and transparent business environment. This closure power also serves as a deterrent against willful tax evasion, reinforcing the principle that businesses, like all taxpayers, have a responsibility to contribute to the nation’s development, through fair and timely tax payments.

Maria Regina C. Gameng
KPMG in the Philippines

Maria Regina C. Gameng is a Supervisor from the Tax Group of KPMG in the Philippines (R.G. Manabat & Co.), a Philippine partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. The firm has been recognized as a Tier 1 in Transfer Pricing Practice and in General Corporate Tax Practice by the International Tax Review. For more information, you may reach out to Tax Supervisor Maria Regina C. Gameng or Tax Principal Kathleen L. Saga through ph-kpmgmla@kpmg.com, social media or visit www.home.kpmg/ph.

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 KPMG International or KPMG in the Philippines.