The start of the year has been good for taxpayers who are under investigation, as new tax rules introduced some changes that will benefit them. Changes such as the lowering of the deficiency interest rate, the no simultaneous imposition of deficiency and delinquency interest, and allowing the deduction of an expense for which necessary withholding tax was belatedly paid are sure to be of great help. As they say, good things come in threes, and I believe the third important change in the tax rules which affects tax investigations is the reinstatement of the Informal Conference stage in the assessment process.
In 2013, the Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) No. 18-2013, which removes the Notice of Informal Conference (NIC) stage in the assessment process. The intention is to expedite the proceedings and avoid corruption through reduced coordination between taxpayers and revenue officers. While the intention was noble, the removal of the NIC stage did not actually resolve the issues it sought to address and, in fact, has just made the assessment more burdensome for taxpayers.
Thus, the issuance of RR No. 07-2018 reinstating the NIC stage is one of the welcome changes in the tax rules for the following reasons:
First, the due process requirement is reinforced. As established under our laws and various jurisprudence, the truest meaning of giving due process under the law is being given the right to be heard before one is deprived of life, liberty, or property. In view of the restoration of the NIC stage, taxpayers are given ample time to explain and present supporting documents on the initial findings of the revenue officer. Only after the NIC stage and when the taxpayer is still found to be liable for deficiency tax shall the case be endorsed for the issuance of the Preliminary Assessment Notice (PAN).
Prior to the issuance of RR No. 07-2018, after the taxpayer submitted the requested documents during the tax investigation, the examiner was to prepare a report and issue a PAN. The revenue officer was not required to discuss the findings with taxpayers. The issuance of the PAN will more likely than not result in the issuance of a Final Assessment Notice (FAN) with the same findings, despite the submission of a Reply to PAN. The 15-day period to issue the FAN set forth under RR No. 18-2013 clearly undermined the taxpayer’s right to due process during the tax investigation. The period provided under the rules to issue the FAN is unrealistic for a revenue officer to evaluate the explanation and supporting documents, taking into account the case load of each examiner. Under previous regulations, the taxpayer was, in effect, limited to presenting an explanation and discussing this with the examiners after the FAN was issued and a protest was filed. Clearly, the right to be heard is curtailed under the previous rules.
Second, bloated assessment is avoided. Revenue officers were previously not required to discuss with taxpayers their findings before issuing the PAN and then the FAN. This practice has resulted in exorbitant deficiency tax assessments, since all discrepancies noted by the BIR are included, even those which can easily be explained, e.g., findings for improperly accumulated earnings tax for a Philippine Economic Zone Authority, final withholding tax for payment to a non-resident foreign corporation for services rendered abroad, timing differences in the recognition of sales/purchases, etc. With the restoration of the NIC stage, discrepancies noted by the BIR may be reduced before the FAN is issued.
Considering that taxpayers and revenue officers are given time to discuss the findings during the NIC stage, simple issues and discrepancies noted can be threshed out immediately. Thus, only the contested findings will be the subject of the PAN and FAN. The issue of the drastic lowering of the tax deficiency paid by the taxpayer, implying a resort to extra-legal means in closing the tax investigation, will be avoided.
Last, the assessment procedure will be expedited. Since the issues will be reduced during the NIC stage, closing the tax investigation within a short period may happen. Under RR No. 07-2018, the NIC stage shall not extend beyond 30 days from the receipt of the notice. If, after the NIC stage, the examiner and the taxpayer have agreed to the remaining findings for tax deficiency, the assessment is likely to be closed at the administrative level, i.e., at the PAN or FAN stage. The fear of a prolonged tax assessment due to the lengthy NIC stage is addressed by the 30-day limit set by the regulation. The extended period of assessment reaching the request for reconsideration stage and the filing of a case in court may be reduced since taxpayers are given more chances to explain their position at the BIR level before the PAN is issued.
With the new tax rules in place, it appears that the government is keen on making compliance easier for taxpayers. The changes we are seeing show that the grievances of taxpayers did not fall on deaf ears. There is more room for improvement in our tax rules, and I believe we can expect more changes to come. For now, however, let us be grateful for this simple victory for taxpayers.
Jennylyn V. Reyes is a manager of the Tax Advisory and Compliance of P&A Grant Thornton. P&A Grant Thornton is one of the leading audit, tax, advisory, and outsourcing services firms in the Philippines.