by: Lance Joshua G. Cangas
We Filipinos are raised by our parents to be polite and use words of power, commonly known as “magic words,” in our daily life. Our parents exemplified the importance of using these magic words, such as the word “please” as a form of politeness when making a request from a family member, a friend or even from a stranger. These words set the line that separates impertinence from courtesy and by doing so, some sort of magic is created that can make a person gravitate to you and thereby granting your request – even if such person was already completely decided on not doing it. Verily, magic words help build rapport with the people we deal with.
Most of us, if not all, would agree that we prefer working with people with good manners over those who are rude and arrogant. According to Marcel Pikhart & Andrea Koblizkova (The Central Role of Politeness in Business Communication), adhering to the politeness principle brings competitive advantage and possible win-win strategies. Accordingly, we can altogether confirm that politeness is highly essential in achieving good business relations, can’t we? However, when does it become bad? When does being nice become one’s disadvantage?
In taxation, the authority of the Bureau of Internal Revenue (BIR) is undisputed when it comes to assessments. When it finds you liable for failure to pay taxes, it can enforce its right duly empowered by the Tax Code to collect in favor of the State. However, despite this immense power, the BIR still wants to establish good business relations with the taxpayers to induce better tax collections. Thus, the BIR sometimes takes a more placative approach on tax disputes because, as the old saying goes, you can catch more flies with honey than with vinegar. But actually, how does being gentle with taxpayers affect the BIR’s collection effort and dealings with the taxpayer?
The Court of Tax Appeals (CTA) reminds the BIR of the limits of its powerful mandate in a recently decided case of Alphaland Makati Place, Inc. (Alphaland) vs. Commissioner of Internal Revenue (CIR) (CTA Case No. 9606, 15 January 2020). The CTA ruled, with judicial precedent in Commissioner of Internal Revenue vs. Fitness By Design, Inc. (“Fitness By Design case”, G.R. No. 215957, 09 November 2016), that the VAT assessment is void because the BIR failed to definitely specify the amount of tax liability of Alphaland.
SC explained in Fitness by Design case that the issuance of a valid formal assessment is a substantive prerequisite for collection of taxes. An assessment does not only include a computation of tax liabilities; it also includes a demand for payment within a period prescribed. Thus, its main purpose is to determine the amount that a taxpayer is liable to pay. SC further opined that a Final Assessment Notice (FAN) is not a valid assessment when it lacks the definite amount of tax liability for which a taxpayer is accountable.
Applying the said SC opinion, the CTA resolved that the FLD is void as it lacked a definite amount of tax liabilities for which Alphaland is accountable. The FLD states: “Please take note that the interest will have to be adjusted if paid beyond November 20, 2015.” Based on such statement, the CTA clarified that although the disputed assessment provides for the computation of Alphaland’s VAT liability, the amount thereof remains indefinite because the said assessment is still subject to modification or adjustment, depending on the date of payment. Conclusively, the VAT assessment including the compromise penalties are void.
In a separate concurring opinion of Justice Castañeda, Jr., he discussed that the disputed FLD was not only void based on the lack of definite amount of tax liability but also because it did “not purport to be a demand for payment of tax due, which a final assessment notice should supposedly be.” Further, the FLD did not clearly establish the due dates and was barred by prescription. A final assessment, according to SC in Fitness by Design case, is a notice ‘to the effect that the amount therein stated is due as tax and a demand for payment thereof.’ This demand for payment signals the time ‘when penalties and interests begin to accrue against the taxpayer and enabling the petitioner to determine his remedies. Thus, it must be ‘sent to and received by the taxpayer and must demand payment of the taxes described therein within a specific period.’
Justice Castañeda, Jr. further explained that to demand means to “require a person to do” and is also defined as “the assertion of a legal right”, “an imperative request preferred by one person to another under a claim of right, requiring the latter to do or yield something or to abstain from some act.”
In the case of Alphaland vs. CIR, the provisions of the FLD reveal that there has been no demand or requirement for the taxpayer to pay the taxes due. This is so because of the phrase in the FLD that states “you may pay the above assessment xxx”. Apparently, the phrase deviates from the very nature of the demand for payment as it gives the taxpayer the option not to pay if the assessment is not amenable to him.
Based on the foregoing, it can be inferred that the BIR should assert its legal right and properly demand the payment of taxes from persons who have failed to comply with the requirements of the Tax Code. A mere notice or request for payment of tax liabilities, contrary to the dictates of the Tax Code, cannot be treated as valid assessment notwithstanding the definite amount of tax required to be paid by a taxpayer having been clearly determined in the FLD.
In summary, the BIR can act all nice and gentle, but the Tax Code does not require it to be. Once, the BIR was nice, but such led to its power’s demise.
Lance Joshua G. Cangas is an Associate from the tax group of KPMG R.G. Manabat & Co. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.
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