A VALID DEMAND IS VITAL IN A TAX ASSESSMENT
By: Atty. Kathleene Guiang on September 3,2020
A valid demand is essential to the validity of a Bureau of Internal Revenue (BIR) assessment of deficiency taxes against a taxpayer. This demand is ordinarily expressed in a formal letter of demand (FLD), which is issued and delivered with a final assessment notice (FAN). Without a valid FLD, the assessment is invalidated for violating the taxpayer’s right to due process.
An FLD calls on the taxpayer to pay its deficiency tax or taxes. As provided under BIR Revenue Regulations 12-99, an FLD should contain the demand for payment of deficiency taxes, as well as a clear statement of the amount demanded and the prescribed period within which those taxes should be paid. As soon as the FAN and FLD are served to the taxpayer, it is obliged to pay the assessed and demanded amount.
The Supreme Court has recognized that a clear statement of the payment date or period in the FLD accompanying a FAN is crucial, since it signals the time “when penalties and interests begin to accrue against the taxpayer and enabling the latter to determine his remedies” (Commissioner of Internal Revenue v. Fitness by Design Inc., G.R. 215957, Nov. 9, 2016).
In the case of Universal Robina Corporation v. Commissioner of Internal Revenue (CTA Case 9530, Jan. 14, 2020), the Court of Tax Appeals (CTA) held that the tax assessment made is void because the FLD failed to state a definite amount payable and definite payment due date. It also held that the FLD, which stated “[p]lease take note that the interest will have to be adjusted if paid beyond the date specified therein” is insufficient because it failed to state the proper amount due and due date. It explained that the amount demanded by the BIR was indefinite, since the tax assessment was still subject to modification or adjustment, depending on the payment date.
The importance of the validity of an FLD in a tax assessment was again emphasized in the case of Commissioner of Internal Revenue v. Ale Mart Corporation (CTA En Banc 1983, July 29, 2020). Here, the CTA found that while the last paragraph of the FLD stated that the taxpayer must pay its deficiency tax liabilities, it did not indicate the specific period during which the payment should be made. The statement of a certain date for the payment is “indispensable,” because it dictates when the penalties, surcharges and interest imposed shall begin to accrue. The CTA also said this was an “essential element” in the demand made by the BIR against a taxpayer for such payment. Without the clear statement of a certain date, the BIR cannot be said to have demanded the amount due, “contrary to the very nature of a tax assessment, which is a demand to pay taxes.” Thus, the CTA ruled that because of the defective FLD, the whole deficiency tax assessment is void.
Moreover, the CTA has held that the issue on the validity of an FLD and its corresponding assessment notice is a “matter of public importance,” and the issuance of a valid formal assessment is a substantive prerequisite for the collection of taxes. In the Ale Mart case, although the taxpayer did not raise the lack of a definite date for payment in the FLD and the notice, the CTA still ruled on the issue.
It is a well-settled rule that a valid assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period. In another case, when the FLD did not make a clear and categorical demand for payment of the alleged tax liabilities and contained merely a request for it, the whole assessment was declared invalid.
The abovementioned cases show that although taxes are the lifeblood of the government, their collection should still be made in accordance with the law and with due process. To dispute the computation of any alleged deficiency tax assessed against them, taxpayers should be clearly informed not only of the factual and legal basis of the assessment, but also the amounts assessed and the periods within which they are required to pay them. All these should be stated in a valid FLD.