Mediation of tax cases

By Catherine T. Manahan, 24 July 2009

The advent of alternative dispute resolution (ADR) in our country began way back in June 19, 1953, when the Arbitration Law, or Republic Act No. (RA) 876, was enacted.

Nothing much was heard about the extent of its implementation as may be gleaned from the scarce jurisprudence on the matter.

This was designed to discourage outright resort to court litigation as a means of settling conflicts, thus, help in decongesting the courts of voluminous, unresolved cases. This barangay justice system was formally integrated in the 1991 Local Government Code.

To date, the latest piece of legislation on ADR is RA No. 9285, otherwise known as the Alternative Dispute Resolution Act of 2004, which formally adopted the state policy of resolving disputes through the modes of mediation, conciliation, arbitration or a combination thereof as a means of achieving speedy and impartial justice in lieu of formal law suits, thus, help de-clog court dockets.

In the case of tax cases, the Amended 2005 Revised Rules of the Court of Tax Appeals (CTA) which took effect last March 20 have explicitly provided the inclusion of a statement in the pre-trial brief of tax litigants regarding the referral to mediation, arbitration or other modes of ADR of the civil tax case [Sec. 5. (a). Procedure in civil cases].

The implementing guidelines for the mediation and arbitration of tax cases are still being drafted by the CTA in coordination with the Philippine Mediation Center. Said guidelines would then be finally approved by the Supreme Court before they can be implemented.

With the expected implementation of the ADR in tax cases, the question of whether this mechanism will work effectively in resolving tax disputes comes into play.

Author Michael I. Saltzman, in his article, "Tax Court mediation: a case study," opined that mediation is a cost-effective and time-efficient procedure for settling factual issues such as valuation issues including those involving transfer pricing.

This observation provides a useful yardstick in determining the aspects of the tax case that can be the subject of mediation, while being bound by certain legal limitations.

In determining the practicality of mediation in resolving tax cases in the Philippines, various factors may have to be considered by the litigants such as:

• the additional costs of mediation;
• the extent and scope of the mediation proceedings;
• the legal limitations under the Tax Code and related tax laws; and
• the qualification of the mediation officers, among others.

Cost-wise, mediation may either reduce or increase the cost of litigation, depending on the outcome of the process. If mediation would result in a compromise, there would be savings on the cost of professional fees of accountants and lawyers due to the shortened litigation process. On the other hand, if the case is not resolved, litigation cost would increase to the extent of the mediation fees that would paid in addition to the regular professional fees of the accounting and tax counsels.

Hence, since mediation would entail additional cost, parties should utilize this mechanism seriously towards the earliest resolution of the tax case.

The extent and scope of the mediation proceedings may refer to the coverage of the mediation proceedings, e.g., whether it will be available to both tax assessment and tax refund cases or will it apply to the deficiency tax only or will it also extend to the interest and surcharge and other penalties or whether it will apply to the civil aspect of tax evasion cases.

In the case of legal limitations, an example would be the rates of compromise settlement that may be granted by the Commissioner of Internal Revenue under Section 204 of the Tax Code, i.e., 10% to 40%.

A jeopardy assessment which was issued without concrete basis may not be equitable to resolve through mediation as this would mean requiring the taxpayer to still pay at the most, 60% of the baseless deficiency tax assessed, the CIR being able to compromise only to the extent of 40%.

Lastly, the qualifications and experience of the tax mediation officer is also an important factor to consider to ensure that a reasonable and equitable compromise is achieved. A mediation officer who has extensive know-how and experience on tax issues and procedures from both the perspectives of the government and the private sector may be perceived as impartial compared to one whose background is limited to only one side or to one who has no tax background at all.

While application of the ADR mechanism in resolving tax cases in the Philippines is rather new, and therefore its efficiency still remains to be tested, I would still welcome it as a positive development.

The enormous build-up of pending tax cases in the CTA has hampered the wheels of justice taking its full course, effectively causing injustice to both the government and the taxpayer.

As the familiar quote says, "justice delayed is justice denied."

Through efficient mediation, early resolution of tax cases is expected which ultimately would redound to the benefit of all parties and the judiciary as well.