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By: Atty. Irish May Quintana on December 3,2020

The abatement or cancellation of internal revenue tax liability is one of the remedies available to taxpayers. This is pursuant to the broad powers of the Commissioner of Internal Revenue (CIR) to cancel and abate tax liabilities under our National Internal Revenue Code (Tax Code). Section 204(B) of the Tax Code expressly provides that the CIR may abate or cancel tax liabilities when the tax or any portion thereof appears to be unjustly or excessively assessed, or the administration and collection costs involved do not justify the collection of the amount due.

Because of the use of the word “may” in Section 204(B) of the Tax Code, it is discretionary on the CIR to decide whether or not to abate or cancel a tax liability. Thus, unless there is an abuse of discretion, the courts will not interfere with the CIR’s exercise or refusal to exercise his power to abate taxes (Lepanto Consolidated Mining v. Commissioner of Internal Revenue, CTA EB 1720, May 3, 2019).

The CIR can exercise his power to abate taxes even if an assessment is already pending with the courts. However, the exercise of such power is subject to the limitations set by the Tax Code and its implementing regulations: Revenue Regulations (RR) 13-2001, as amended by RR 4-2012, and Revenue Memorandum Order (RMO) 20-2007.

Unjust or excessively assessed tax liability

The CIR can exercise his power to abate when taxes are unjustly or excessively assessed. In Koppel (Philippines) Inc. v. The Collector of Internal Revenue (G.R. L-1977, Sept. 21, 1950), the Supreme Court held that a tax is “unjustly” assessed when, compared to other taxpayers assessed, the concerned taxpayer was not treated in the same manner in the tax assessment as the other taxpayers. On the other hand, a tax is considered “excessively” assessed when the assessment is over and above the tax imposition made under the law. It should be noted, though, that “continuous heavy losses incurred by the taxpayer” cannot be treated as falling under the category of a tax being “unjustly” assessed that would warrant an abatement. In the Lepanto case, the CTA En Banc held that there is no rational connection between being “unjustly” assessed of a tax and sustaining “continuous heavy losses” regardless of the duration thereof.

Penalties and surcharges (but not interest) can also be abated when the taxpayer fails to file the return and pay the correct tax on time due to circumstances beyond his control (Section 2.5 of RR 13-2001).

A system error of the electronic filing and payment system (eFPS) has been previously held as a circumstance outside the control of the taxpayer, and would therefore warrant an abatement. In Hon. Kim S. Jacinto-Henares v. Philippine Plaza Holdings Inc., (G.R. 247662, Dec. 10, 2019), the Supreme Court upheld the CTA En Banc’s ruling that the failure of the taxpayer to timely file its value added tax return due to a system error of the BIR’s eFPS facility warranted the cancellation or abatement of the surcharge imposed. In this case, the taxpayer was able to show its diligent efforts to file its tax return on time, but was constrained due to the system error. Thus, the CTA En Banc granted the prayer for refund of the surcharges the taxpayer paid, which should have been abated or canceled due to the unfavorable circumstance outside the taxpayer’s control.

However, in Qatar Airways Company with Limited Liability v. Commissioner of Internal Revenue (G.R. 238914, June 8, 2020), the Supreme Court held that the failure of the taxpayer to file its income tax return due to the unavailability of the eFPS is not a sufficient ground for the abatement of the surcharge. The Supreme Court explained that a technical malfunction is not a situation too bleak that would render the taxpayer without recourse, since the taxpayer could have resorted to manual filing. The Supreme Court did not consider the unavailability of the eFPS as a “circumstance beyond control” of the taxpayer.

Thus, despite that the taxpayer was only one day late from the deadline of filing, the Supreme Court did not consider unjust or excessive the CIR’s imposition of the 25-percent surcharge for the late filing of the income tax return, as provided under Section 248(A)(1) of the Tax Code.

The above ruling was reiterated in BAP Credit Bureau Inc. v. Commissioner of Internal Revenue (CTA EB 2095, Sept. 3, 2020), wherein the CTA En Banc cited RMO 5-2002, which provides that, in case the eFPS is not available during due dates, the taxpayer shall manually file its returns.

Based on the foregoing, taxpayers should still take the conservative position of ensuring to file their income tax returns, manually or electronically, before the deadline to avoid incurring surcharges and penalties. They cannot assume that just because they will incur losses during this Covid-19 pandemic that the CIR will abate their tax liabilities.

However, we do believe that, with the existence of the limitations caused by the pandemic and the increasing reliance on online avenues, such as the eFPS, to settle tax obligations and liabilities, the CIR should find a just balance in exercising its power to abate surcharges and/or penalties when the circumstances warrant.

The CIR’s power to abate taxes

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