Due process applies to every stage of the assessment process

The pandemic has increased uncertainty in everyday life and in business planning. However, amidst this difficulty one thing remains the same – taxes and tax assessments are vital considerations for businesses. The reality holds true to the adage, “There are only two things certain in life, death and taxes.”

This is reflected in the way tax authorities and taxpayers now interact, hastening the adoption of technology-based solutions to continue with the conduct of tax assessments. The way we interact may have changed, but the basic tenet of due process remains the same in tax assessments: a tax assessment issued in violation of the due process rights of a taxpayer are considered null and void.

Under Section 228 of the Tax Code, whenever the tax authorities find that proper taxes should be assessed, they must notify the taxpayer of their findings. The notice shall be in writing and must include the law, as well as the facts on which the assessment is made.  Failure to do so, the assessment shall be void.  This component of due process is crucial as it applies to every step of the assessment process outlined in Revenue Regulations (RR) 12-1999, as amended, to enable the taxpayer to make an effective protest or appeal of the assessment notice or decision.

On the other hand, RR 22-2020 states that if a taxpayer is found to be liable for deficiency during an investigation, the taxpayer shall be informed through a Notice of Discrepancy or NOD. Through a discussion with the authorized revenue examiner, called a “discussion of the discrepancies,” the taxpayer is given the opportunity to present his side and explain the discrepancies reflected in the NOD. The taxpayer shall submit all necessary documents to support his explanation within 30 days after receipt of the NOD.

If the tax authorities still find the taxpayer liable for deficiency tax or if the taxpayer is unable to sufficiently address the items in the NOD, a Preliminary Assessment Notice (PAN) may be issued within 10 days from the conclusion of the discussion of the discrepancies.

In the issuance of the PAN, RR 18-2013 presents that if the taxpayer disagrees with the findings stated in the PAN, he has 15 days from receipt of the PAN to respond. After the lapse of the 15-day period to reply to the PAN, a Formal Letter of Demand (FLD) or Final Assessment Notice (FAN) may be issued. However, there is an underlying question that must be asked: Are the taxing authorities allowed to issue an FAN/FLD without addressing the taxpayer’s arguments in the protest or reply to the PAN?

In the recent Court of Tax Appeals (CTA) Case 9728 (dated Nov. 18, 2021), the Tax Court stated that the mere issuance of a PAN without intention on the part of the taxing authorities to consider the taxpayer’s reply to the PAN is a violation of the taxpayer’s right to procedural due process.

In this case, the taxing authorities has issued an FAN/FLD to the taxpayer who: (1) Repeated the contents of the PAN, differing only in the computation of interest. (2) Neither referred to nor addressed the taxpayer’s arguments in the reply to the PAN. And, (3) Was not accompanied by a computation sheet. According to the CTA, issuing the FLD, which is an exact replica of the PAN, sans any indication in the FLD that due consideration was accorded on the taxpayer’s explanations or arguments stated in the reply to the PAN, renders the FLD void.

The CTA also noted that the Final Decision on Disputed Assessment (FDDA) also repeated the contents of the PAN and FLD, to which they did not address the arguments raised in the reply or protest to the PAN and request for reinvestigation to the FLD. The reasons for rejection of the arguments were noted in an internal memoranda, but not otherwise included in the FDDA. The CTA set aside the FDDA and enjoined the tax authorities from collecting taxes based thereon.

The CTA decision highlights that due process requires that the reasons for the rejection of the taxpayer’s arguments in the reply or protest to the PAN and/or FLD should be reflected in the FLD or FDDA respectively, otherwise there is what the CTA referred to as, “A failure to observe the standards of due process in assessments.”

While the government has an interest in the swift collection of taxes, the assessment and collection should be exercised justly and fairly, and always in strict adherence to the requirements of the law, rules, and regulations. Due process is anchored on fairness and equity in procedure. The right to be heard and the right to present evidence are meaningless if evidence is ignored without reason. The CTA, citing GR 201398-99 and 201418-19 (dated Oct. 3, 2018), emphasized that taxing authorities are not obliged to accept the taxpayer’s explanation. However, when they reject the explanation, they must present a reason for doing so. It should not be unfounded or baseless, and must include evidence. This shapes the duty of the tax authorities to apprise the taxpayer of the legal and factual bases of the assessment.

Nicoleigh Balagtas is a supervisor from the tax group of KPMG R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International.

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 KPMG International or KPMG RGM&Co.

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