In the Philippines, entities comply with taxation laws on a pay-as-you-file basis. Compliance is voluntary and the taxpayers are held responsible for determining the amount of tax that should be paid, the returns that are to be filed, and when to do so, i.e. filing and paying the tax.
However, this voluntary compliance does not give carte blanche authority to taxpayers to determine the tax they ought to remit to the government coffers. The Bureau of Internal Revenue (BIR) has a check and balance mechanism, which vests upon the Tax Bureau the authority to conduct a tax assessment or investigation of the taxpayers’ compliance within three (3) years from the statutory deadline of filing or the date of actual filing. The aforementioned period is longer (i.e. 10 years) if the returns were filed fraudulently or if no tax return was ever filed.
In this article, we will give you an overview of the tax assessment process in the Philippines and how we may be able to give assistance in handling efficiently and effectively the BIR tax investigations being held in Davao City and Davao Region.
Letter of Authority (LoA)
Considering the number of assessments being carried out by the BIR’s Revenue Officers (RO), a Letter of Authority (LoA) is being issued authorizing the RO of a particular Tax Assessment Group, led by a Group Supervisor (GS) to conduct the said investigation.
Under the rules, the LoA should be served within thirty (30) days from the date of issuance and carries with it a request to submit documents. The LoA specifies which tax types are to be examined, e.g. income tax, value-added tax (VAT), or withholding taxes. Moreover, the LoA will also state the period covered by the investigation, which will only be for one (1) taxable year.
Given that the LoA is already served to the taxpayer, documents are then required by the BIR to be made available. These documents, together with other information that the RO may gather from the BIR system and third parties, will serve as the bases for the tax examination. The service of the LoA serves as the First Notice to the taxpayer.
A Second Notice will be sent, to press the taxpayer for full compliance with the documentary requirements. Failure of the taxpayer to respond to the aforementioned, a Final Notice will be served.
If the taxpayer should still fail after the Final Notice, a Sub Poena Duces Tecum shall then be issued by the BIR which will mandatorily require the submission of documents, files, and papers, within a specified time and place. Please bear in mind that failure to comply with the Sub Poena is a ground for criminal prosecution through an action filed with the Prosecutor’s Office. If probable cause is determined, it may then be recommended that information be filed with the Criminal Court for the prosecution of the taxpayer. This has to be avoided and a tax expert should be able to guide you during the entire process.
Preliminary Findings or Notice of Informal Conference
Upon evaluation of the documents submitted, the preliminary findings will be submitted by the RO and the GS to the Revenue District Officer (RDO), the head of the Revenue District Office, for approval.
Upon approval of the preliminary findings, the Notice for Informal Conference (NIC) will be issued with the proposed assessment. The NIC also serves as an invitation for an informal conference, which the taxpayer may either attend or submit a Position Paper within the same period, refuting the assessments made by the BIR based on facts, jurisprudence, applicable laws, rules, and regulations. Documents may also be submitted to support and substantiate the taxpayer’s argument.
The taxpayer may also prepare, with assistance from tax experts like Davao Accountants in handling tax assessments or tax investigations, own computation, and propose an alternative assessment. If pressed for more time, the taxpayer may also execute and submit to the BIR a Waiver from the Defense of Prescription (Waiver) that will extend the three (3) year prescriptive period.
The RDO may revise the proposed assessment or may simply forward the original findings to the Assessment Division of the BIR Revenue Region (RR), the office next higher to the Revenue District Office.
Preliminary Assessment Notice
Based on the findings forwarded by the RDO, the Assessment Division of the RR shall conduct a study to determine if there is a need to continue with the assessment. Should the said Division be convinced that the assessment should continue, a Preliminary Assessment Notice (PAN) containing the proposed assessment will be issued unless PAN is no longer necessary. The PAN will contain the material items of the NIC.
Within fifteen (15) days from the receipt of the PAN, the taxpayer may file a Protest Letter, which will discuss disagreements with the proposed assessment citing factual circumstances, the jurisprudence, applicable laws, relevant rules, and regulations. Supporting documents may also be submitted along with the Protest or shortly thereafter.
Formal Assessment Notice
After review and evaluation of the Protest to the PAN, the BIR may either cancel the assessment or, if it finds no basis for cancellation, an Assessment Notice (AN) or Formal Assessment Notice with Formal Letter of Demand (FAN-FLD) will be issued. The FAN-FLD must be issued by the BIR within the three (3) year prescriptive period from the date of tax return is required to be submitted by law or from the actual date of filing. Failure of the BIR to issue the FAN-FLD within the 3-year period (or 10 years in cases of fraud or non-filing), shall terminate the BIR’s right to assess, thereby releasing the taxpayer from its potential tax liabilities for the covered taxable year.
If the taxpayer disagrees with the FAN-FLD, a Protest must be filed within thirty (3) days from the receipt thereof. Supporting documents must also be submitted within sixty (60) days from the filing of the protest. Note that failure to file the aforementioned protest and the supporting documents with the reglementary periods will make the assessment final and executory, divesting the taxpayer with the right to contest the assessment and consequently ending with no other option but to pay the said assessment.
Upon consideration of the Protest, the BIR may decide through the issuance of its formal communication, called the Final Decision on Disputed Assessment (FDDA). The BIR may also make its decision manifest by just simply initiating collection proceedings, by issuing a Preliminary Collection Letter (PCL) without any formal reply to the FAN-FLD. Receipt of the two aforementioned issuances from the BIR means that the taxpayer lost the case with the BIR administrative level. But this may be avoided if assistance is sought upon the start of the BIR investigation.
Do not fret, however, as losing at the administrative level means that the taxpayer will then have the opportunity to elevate the tax case to the Court of Tax Appeals (CTA) Division for review. Davao Accountants may also provide assistance at the CTA and SC levels, but best practice dictates that the tax investigation should be settled at the administrative level.
Any tax investigation would naturally cause worries to any taxpayer. But one should not be afraid, as there are agencies or firms in Davao City that may lend a helping hand. Davao Accountants will connect you with our tax practitioner who will help you organize the documentary requirements, manage the ROs, and prepare explanations or justifications for discrepancies that may be found during the investigation.
However, to avoid any tax problems, reliable tax compliance should have been made early on. A business entity must keep the books of accounts in order and that correct taxes are reported and filed with the BIR. Davao Accountants may also provide assistance in your tax compliance concerns or in providing excellent and dedicated bookkeepers.