Letter of Authority: Does it matter?

Oliver Wendell Holmes Jr., former justice of the United States Supreme Court, once said, “Taxes are what we pay for a civilized society.” Without taxes, it would be difficult, if not impossible, for the government to operate. Also, taxes are the lifeblood of the government. As such, the absence of taxes would impair the government’s existence.

Hence, every person is required by law to contribute so the government can function.

Although the state’s taxing power is unlimited, comprehensive and supreme as well as indispensable to defray the expenses of the government, it should not be exercised arbitrarily. Thus, the state must observe due process of law in accordance with the 1987 Constitution in dealing with taxpayers, who have allegedly committed violations under the National Internal Revenue Code (NIRC).

Medicard Philippines Inc. (Medicard), an organization that provides prepaid medical, health maintenance and related services was denied due process when the commissioner of internal revenue (CIR) assessed it of deficiency value-added taxes (Medicard Philippines Inc. vs. CIR, G.R. No. 222743, April 5).

According to the Supreme Court in the above case, the value-added tax deficiency assessment issued against Medicard is unauthorized since the CIR, or his duly-authorized representatives, failed to issue a Letter of Authority (LOA).

Revenue officers can only examine taxpayers within the jurisdiction of their district to collect the correct amount of taxes or to recommend the assessment of any deficiency tax due if they are equipped with an LOA.

Now, what is an LOA? In the case of CIR vs. Sony Philippines Inc. (G.R. No. 178697, Nov. 17, 2010), an LOA is the authority given to the appropriate revenue officer assigned to perform assessment functions. It empowers or enables the revenue officer to examine the books of account and other accounting records of a taxpayer for the purpose of collecting the correct amount of tax.

There is a need for a revenue officer to have an LOA because under the NIRC the power to examine returns and make assessments is given to the CIR or his duly-authorized representatives only.

A Letter Notice (LN) cannot be issued in lieu of an LOA because they are not of a similar nature.

The purpose of an LN is to notify the taxpayer of discrepancies in the computerized or manual matching of sales and purchases or expenses under the Reconciliation of Listing for Enforcement System (RELIEF System).

RMO 30-2003 allows that the RELIEF System to detect tax leaks by matching the data available under the BIR’s Integrated Tax System with data gathered from third party sources. By consolidating and cross-referencing third party information, discrepancies on sales and purchases can be produced to detect any under-declared income and over-claimed purchases of goods and services.

Under RMO 42-2003, which is a supplement to RMO 30-2003, discrepancies generated by computerized or manual matching of sales and purchases or expenses, even without conducting a detailed examination of taxpayer’s books and records, shall be communicated to the concerned taxpayer through the issuance of an LN by the CIR. Additionally, the said RMO mentions that an LN is akin to a Notice for Informal Conference.

Consequently, the Bureau of Internal Revenue issued RMO 32-2005 which aims to fine-tune existing procedures in handling an assessment against a taxpayer who received an LN. RMO 32-2005 states that if the taxpayer controverts the discrepancies in the LN, the taxpayer is given 120 days from the date the LN was issued to reconcile its records with the BIR. However, if the discrepancies remain unsolved after the lapse of the 120-day period, the revenue officer, who handled the LN, shall recommend the issuance of an LOA to replace the LN.

Going back to the case of Medicard, the Supreme Court had the occasion to differentiate an LOA from an LN. The Supreme Court held that, “First, an LOA addressed to a revenue officer is specifically required under the NIRC before an examination of a taxpayer is conducted, while an LN is not found in the NIRC and is only for the purpose of notifying the taxpayer that a discrepancy is found in the BIR’s RELIEF System. Second, an LOA is valid only for 30 days from date of issue, while an LN has no such limitation. Third, an LOA gives a revenue officer only a period of 120 days from receipt of LOA to conduct his examination of the taxpayer, whereas an LN does not contain such limitation.”

Based on the above, an LN is indubitably not equivalent to an LOA. Absent an LOA issued by the commissioner or his duly-authorized representatives, revenue officers will not have the authority to conduct examinations of taxpayers. Thus, assessments resulting from such examinations are void.

It is of paramount importance to the BIR to assess and collect all national internal revenue taxes, and enforce penalties in relation thereto. However, this cannot be done without affording taxpayers due process of law, which is a fundamental right guaranteed nonetheless by our Constitution. Therefore, any violation of such right should not be countenanced.

Lawyer Kris Marian D. Banzon is a supervisor from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice, Tier 1 transfer pricing practice, Tier 1 leading tax transactional firm, and the 2016 National Transfer Pricing Firm of the Year in the Philippines by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email [email protected] or [email protected].