Philippines: Tax audits, compromise penalties (court decisions)

The Court of Tax Appeals en banc issued the following tax-related decisions.

• A memorandum of assignment (MOA) cannot be a substitute for a valid letter of authority (LOA). Unlike an LOA, which is a special authority granted to a particular revenue officer, an MOA does not emphasize that the new set of revenue officers who will pursue the audit are properly authorized to do so. It simply notifies a taxpayer of the transfer of an audit/investigation to another set of revenue officers. An LOA does not need to take a particular form. Any document may qualify as an LOA provided that an essential requisite is present—the LOA must be issued either by the Commissioner of Internal Revenue (CIR) or by a duly authorized representative. The case is: CIR v. First Life Financial Co., Inc., CTA Case EB No. 2263 (3 February 2022)
• A referral memorandum is not equivalent to an LOA when it refers the continuance of the audit/investigation to a new set of revenue officers or when the revenue officer named in the original LOA will just continue the audit/ investigation without the other revenue officers named therein. As the LOA commences the audit process and informs the taxpayer that it is under audit for possible deficiency tax assessment, there must be a grant of authority before any revenue officer can conduct an examination or assessment. In the absence of such authority, the assessment or examination is void. The words "transfer of cases to another revenue officer" suggests quite plainly that a new set of revenue officers will continue the audit/investigation of the taxpayer's records, hence, necessitating the issuance of a new LOA. The case is: CIR v. Market Strategic Firm, Inc., CTA EB No. 2281 (9 February 2022)
• Strict adherence to the schedule of penalties listed under Revenue Memorandum Order (RMO) No. 19-2007 is required to determine the legality of compromise penalties. RMO No. 19-2007 (8 August 2007), otherwise known as “The Consolidated Revised Schedule of Compromise Penalties for Violations of the National Internal Code,” is controlling in determining the legality of the penalties imposed on taxpayers. There are only two exceptions when the penalties may differ from the said schedule: (1) when a compromise offer is lower than what is provided in the said schedule, there must be an approval from the CIR, or concerned deputy commissioner/assistant commissioner/regional director; and (2) when a compromise offer is higher than those penalties, the offer must be in writing and if there is an apprehension slip, the form provided in Annex B of RMO No. 19-2007 is to be used. In all cases, all amounts of compromise penalties incident to violations need to be itemized in an assessment notice and/or demand letter, and if the compromise offer is higher, then all offers must be in writing. The case is: CIR v. Dunlevy Food Corporation, CTA EB No. 2294 (8 February 2022)

Read a June 2022 report prepared by the KPMG member firm in the Philippines