BIR Needs to Give Due Consideration to Taxpayer’s Arguments
By Gwendolyn Ann Banaria on April 28, 2022
The Supreme Court, in the case of Commissioner of Internal Revenue (CIR) vs Avon Products Manufacturing Inc. (decided on Oct. 3, 2018), held that the giving of a fair and reasonable opportunity to be heard is not the only aspect of due process in tax assessments, but also that due consideration must be given by the decision-maker to the arguments and evidence submitted by the affected party. Administrative due process demands that the party’s defenses be considered by the administrative body in making its conclusions and the party be sufficiently informed of the reasons for its conclusions.
Section 228 of the National Internal Revenue Code, as amended, which governs the protest of an assessment by taxpayers, provides that the taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void.
To implement said provision of the law, the Bureau of Internal Revenue (BIR) issued Revenue Regulation (RR) 12-99, as amended by RR 18-2013, which outlines the procedure in the issuance of assessments, as well as how to protest them. Section 3 of RR 12-99 provides that, after review and evaluation by the Commissioner of Internal Revenue (CIR) or his duly authorized representative, the CIR shall issue to the taxpayer a preliminary assessment notice (PAN) for the proposed assessment, which shows in detail the facts and the law, rules and regulations or jurisprudence on which the proposed assessment is based. The taxpayer is given 15 days to reply to the PAN, after which the BIR shall issue a formal assessment notice (FAN) with a formal letter of demand. The FAN should also show the facts and the law upon which the assessment is based. The taxpayer has 30 days to protest the FAN.
What happens if a taxpayer receives a FAN that is all but identical to the PAN verbatim, except that the amounts of the assessment were readjusted to consider additional penalty interest?
In recent decisions, the CTA ruled that the BIR’s non-appreciation of the explanations or defenses petitioner raised against the subject PAN was in violation of the taxpayer’s right to administrative due process, thereby rendering the subject assessment void. In these cases, the basic taxes due in the VAT assessment in the FLD and FAN were exactly the same as those stated in the PAN, except for the amounts of interest. The BIR reiterated the same findings as stated in the PAN, without giving any reason for rejecting the petitioner’s refutations and explanations in its letter protest. In other words, where the FLD and FAN was a verbatim reproduction of the PAN, differing only in the computation of the interest, and where the FAN contained the very same issues and the same amount of deficiency taxes stated in the PAN (apart from the computation of interests and the addition of a compromise penalty), the CTA held that the subject tax assessments were issued in violation of the taxpayer’s due process rights. The CTA categorically held that the taxpayer’s right to answer the PAN carries with it the correlative duty on the part of the CIR to consider the response thereto, and the issuance of the FAN in complete disregard of the taxpayer’s side, arguments and evidence is an affront to the cardinal principles of due process.
In summary, if the CIR fails to inform the taxpayer of the reasons for the rejection of the latter’s argument by merely rehashing the PAN, the CIR then fails to observe the standards of due process mandated by law, which renders the assessment null and void. While the CIR is not obliged to accept the taxpayer’s explanations, the CIR must give a reason for rejecting the explanations and the particular facts upon which his/her conclusions are based. The CIR cannot simply ignore the evidence presented by the taxpayer without stating the reason.
While the government has paramount interest in the swift collection of taxes, the CIR and its revenue officers should continue to strictly comply with the requirements of the law, with the BIR’s own rules, and with due regard to the taxpayers’ constitutional right to due process of law.
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Gwendolyn Ann I. Bañaria is a junior associate of Mata-Perez, Tamayo and Francisco.