The effect of a new assessment in the Final Decision on Disputed Assessment
Today is Araw ng Kagitingan, in which we respectfully honor all the gallant Filipino and American soldiers as well as civilians who gave their lives to protect Bataan against the Japanese soldiers in the defense of freedom during World War II. RA No. 3022 proclaimed the ninth day of April as Bataan Day, and all public officials and citizens of the Philippines are urged to observe one minute of silence at 4:30 in the afternoon and to hold appropriate rites in honor of the heroic defenders of Bataan and their parents, wives, and families. EO No. 203, s. 1987, then renamed Bataan Day to Araw ng Kagitingan, and retained the provisions of the Administrative Code of 1987.
In tax assessment, the Bureau of Internal Revenue (BIR) and the taxpayers will likewise protect and defend their duties and rights based on laws, rules and regulations, and jurisprudence. The BIR must ensure that taxpayers are declaring and paying the correct amount of taxes based on their valid examination of the books of account and collect payment, upon notice and demand, of any deficiency due to the government. Whereas the taxpayers need to exhaust all administrative remedies to challenge any alleged tax deficiency before seeking relief from the courts.
Filing a protest to a Formal Letter of Demand (FLD) and Final Assessment Notice (FAN), which may either be a request for reconsideration or a request for reinvestigation, is among the administrative remedies available to taxpayers. The assessment then becomes a disputed assessment, and the Commissioner of Internal Revenue (CIR) or a duly authorized representative has a duty to resolve and decide on the disputed assessment. This decision is known as the “Final Decision on Disputed Assessment (FDDA).”
Section 3.1.6 of Revenue Regulations (RR) No. 12-99, as amended, provides that the decision of the Commissioner or his duly authorized representative must (a) state the facts, the applicable law, rules and regulations, or jurisprudence on which such a decision is based; otherwise, the decision is deemed void, in which case it cannot be considered a decision on a disputed assessment; and (b) that the same is his final decision.
The Supreme Court (SC) enunciated the requirements of a valid FDDA in Commissioner of Internal Revenue v. Manila Medical Services, Inc., G.R. No. 255473, citing the case of CIR v. Liquigaz Philippines Corp., which stresses the importance of providing the taxpayer with an adequate written notice of their tax liability. Section 228 of the NIRC declares that an assessment is void if the taxpayer is not notified in writing of the facts and law on which it is based. Additionally, Section 3.1.4 of RR No. 12-99, as amended, requires that the FLD state the facts and law on which it is based; otherwise, the FLD/FAN itself is considered void. Meanwhile, Section 3.1.6 of the regulations specifically requires that the decision of the CIR or a duly authorized representative on a disputed assessment state the facts, law, and rules and regulations, or jurisprudence on which the decision is based. Failure to do so would invalidate the FDDA.
As such, incorporating a new assessment in the FDDA not covered by Preliminary Assessment Notice and FAN/FLD would render the decision void in violation of the requirements under Section 228 of the NIRC, as amended, and Section 3.1.6 of Revenue Regulations No. 12-99, as amended.
In CIR v. First Sumiden Circuits, Inc. (FSCI), C.T.A. EB Case No. 1831, the Court of Tax Appeals (CTA) En Banc canceled the assessment on realized forex gain not subjected to tax based on the violation of due process. Since an entirely new assessment item in the form of “realized forex gain not subjected to tax” was included in the FDDA, FSCI was not given the chance to refute within the administrative level the assessment.
Similarly, the CTA En Banc has ruled in CIR v. BPI-Philam Life Assurance Corp. (BPLAC), C.T.A. EB Case No. 1240, that the change of the nature of the assessment from deficiency VAT to deficiency premium tax only upon the issuance of the FDDA unduly deprives BPLAC of an opportunity to be heard and to dispute the new assessment at the administrative level. It bears stressing that the FDDA constitutes the CIR’s final decision on BPLAC’s administrative protest. To allow the BIR to change the nature of the assessment or to surprise the taxpayer with a new assessment at such a late stage would certainly render the protection afforded by Section 228 of the 1997 NIRC meaningless.
Moreover, the CTA had the same pronouncement in Fluor Daniel, Inc.-Philippines (FDIP) v. Commissioner of Internal Revenue, C.T.A. Case No. 7793, and elucidated that the change of assessment from EWT to FWT in the FDDA is considered a new assessment. FDIP’s defense in its protest letter focused on its non-liability to EWT. However, such changes from EWT to FWT in the FDDA clearly deprived FDIP of a chance to refute the same at the administrative level.
Notably, administrative due process is anchored on fairness and equity in procedure, as the SC emphasized in Commissioner of Internal Revenue v. Avon Products Manufacturing, Inc., G.R. Nos. 201398-99 & 201418-19. The SC further held that administrative due process is satisfied if the party is properly notified of the charge against it and is given a fair and reasonable opportunity to explain or defend itself.
Thus, the BIR acts as the soldier of the government in collecting the tax deficiencies from the people in accordance with their official duties. Nonetheless, taxpayers will protect their property in any case, especially when their right to due process enshrined under the 1987 Philippine Constitution is unduly set aside.
Therefore, incorporating new assessments into the FDDA would completely deprive the taxpayer of the right to due process. As such, the FDDA should be made in strict compliance with the due process requirements; otherwise, the decision is deemed void. In effect, such a decision rendered by the CIR or a duly authorized representative may not be considered a decision on a disputed assessment and should be considered as not having been assessed within the prescriptive period. Hence, a void FDDA bears no fruit and, consequently, bars the BIR’s right to collect.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Penelope Germaine D. Sernande is a senior associate from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.
