Will a taxpayer’s bill of rights help? (Part 2)

Alexander B. Cabrera Chairman and Senior Partner, PwC Philippines 26 Jan 2020


If litigation fees from baseless assessments can be recovered from the BIR by right, behavior can change. Unless the tax case stands on facts and strong legal grounds, examiners will think twice before daring taxpayers to go to court.

Indeed, the right to recover litigation costs on baseless assessments is a pivotal right as discussed last Sunday. Here are the other rights that, if promulgated into law, can change behavior on the ground:

The right to be informed of the BIR’s prima facie evidence of fraud.

When some examiners who have slept on their jobs want to continue the examination even if the case has prescribed, what do they do? Manufacture a fraud allegation so that the case becomes virtually imprescriptible. Using the fraud card, the examiner will ask for documents and examine the taxpayer’s records even if such examination is being conducted beyond the regular three-year period.

When taxpayers ask for the prima facie evidence of fraud, and if the examiner refuses to disclose the evidence of fraud, it’s because the truth is, he needs to proceed with the examination to find some evidence of fraud. That, my friends, is a fishing expedition, which is not allowed under the law, or the Constitution.

Fraud is such a serious allegation because it is a criminal act and officers of the company can go to jail for it in addition to paying the deficiency taxes. The Constitution guarantees the right of the accused has the right to know and confront witnesses against him. 

If the BIR alleges fraud, the least it should do is disclose its prima facie evidence to the taxpayer and allow the taxpayer to disprove it. If not disproved, that is the only time the fraud examination can proceed. The evidence cannot be kept a secret from the taxpayer because anyone can allege fraud and justify a fraud examination. It is harassment in the guise of a hidden third party information.

The right not to be disregarded or ignored on grounds for protest

When the BIR comes up with findings, they conduct initial discussions with the taxpayer and unresolved items graduate into a preliminary assessment. The taxpayer is given 15 days or longer to answer and present evidence. The remaining unresolved issues can graduate to a final assessment notice (FAN). When the FAN is protested, those issues that remain unsettled can be collected through a Final Decision on Disputed Assessment (FDDA), which can be protested one last time by the taxpayer to the Commissioner or already elevated at that point to the Court of Tax Appeals. This is called due process.

It is denial of due process however if the BIR will simply not read, nor listen to the defenses, nor turn a blind eye to the evidence presented before them until the status of the case becomes a final decision. A blind eye or a closed mind makes a mockery of the processes required by law. To be fair, I give testament that the BIR can be reasonable and fair as is our experience with them. But this utter disregard of evidence in favor of the taxpayers happens, and not only on a few occasions.

The right to reasonable requirements during an examination

The BIR is not your regular external auditor who simply samples and test-checks. They need, and are allowed, to get more details. But the details required can sometimes be quite unreasonable, especially given that the taxpayer may be looking for documents stocked and set aside already for several years. The requirement of “100 percent substantiation” can give taxpayers hell on earth. To pick an example, the importation records of the Bureau of Customs (BOC) can be compared with the taxpayer’s recorded importation in their VAT returns. The discrepancy can arise from inaccuracy in BOC records, or the timing of the taxpayer’s recording of VAT (depending on whether the taxpayer is a seller of goods or services), to mention a few examples. 

To require the taxpayer to substantiate 100 percent of its importation because there is a discrepancy in comparing BOC and BIR records is a tortuous accounting process because of the daily volume of transactions. This unfortunate ordeal for the taxpayer can be avoided if the BIR adopts a qualitative and quantitative sampling scheme. When they find exceptions, they can require further substantiation. But to compel “100 percent substantiation” and collect taxes on anything less than that is quite harsh and unreasonable.

The right against administrative legislation

When you have net operating losses (NOL) for, say, 2015 and you’ve carried over that loss to 2016, it is completely legitimate because you can carry it over the next three years. When the BIR examines you in 2015, and finds deficiency income taxes, you may say there’s no harm because you have available NOL anyway. Not so because often, the BIR examiner will disallow or ignore all your NOL for 2015 because you carried that over already (they do this as well for excess input VAT credits carried over). The reason: it’s hard to monitor when and how much the taxpayer utilizes as credits in 2016 and the following years to ensure that there’s no double benefit. But what is for the convenience of the BIR can negate substantive rights given to the taxpayer.

The BIR has no discretion not to honor the rights given to the taxpayer under the law just because their work will be more difficult. To do so will be unexcusable administrative legislation and neglect of duty.

Alexander B. Cabrera is the chairman and senior partner of Isla Lipana & Co./PwC Philippines. He is the chairman of the Integrity Initiative, Inc. (II, Inc.), a non-profit organization that promotes common ethical and acceptable integrity standards. Email your comments and questions to aseasyasABC@ph.pwc.com. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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Alexander B. Cabrera

Chairman and Senior Partner, PwC Philippines

Tel: +63 (2) 8459 2002

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