“No person shall be deprived of life, liberty or property without due process of law.” This is probably one of the most powerful provisions in our Constitution. It guarantees respect for one’s rights by observing rules and establishing limitations when it comes to legal processes in the Philippines. For instance, in tax assessment cases, rules promulgated by our Tax Code and its implementing regulations must be observed to ensure that taxpayers are afforded due process.
As a background, the assessment process commences with the issuance of a Letter of Authority (LoA) evidencing the authority given to specific BIR Revenue Officers to examine the books and other accounting records of a taxpayer. After conducting an audit, the Revenue Officers will formalize their initial findings of deficiency taxes through the issuance of the Notice of Discrepancy (NoD). At this stage, under Revenue Regulations (RR) No. 22-2020, taxpayers have the opportunity to discuss the discrepancies and submit documents to support their explanations within 30 days from receipt of the NoD.
If the findings remain unresolved, the BIR will issue a Preliminary Assessment Notice (PAN), and the taxpayer may, within 15 days from receipt, file a reply. Thereafter, if still unresolved, the BIR will issue the Formal Letter of Demand and Final Assessment Notices (FLD/FAN) and the taxpayer is granted a non-extendible 30-day period from receipt thereof to file a protest letter (either in the form of a request for reconsideration or a request for reinvestigation, as the case may be); otherwise, the assessment becomes final, executory and demandable.
It is at the transition between the PAN to the FLD/FAN stage that a due process issue might arise. Unlike at the FLD/FAN stage, the taxpayer’s failure to file a reply to the PAN does not produce the same effect of making the assessment final, executory and demandable. Responding to the PAN is not mandatory but is only an option for taxpayers to avail. Thus, if an FLD/FAN is issued prior to the taxpayer submitting a response to the PAN or before the expiration of the 15-day period to reply, is there a disregard for procedural due process requirements under the law?
In G.R. No. 249153 promulgated on Sept. 12, 2022, the Supreme Court emphasized the necessity for strict observance of the due process requirement when it comes to the issuance of assessment notices in order to uphold the taxpayer’s constitutional rights. Citing another doctrinal ruling, the Court reiterated that the PAN is part and parcel of the due process requirement for tax assessments in the Philippines and the BIR must comply with the provisions of the law and its own rules. This preliminary stage of the assessment may serve as an avenue for both the tax authority and the taxpayer to settle the case at the earliest opportunity without the need to elevate the case to the next phase (i.e., FLD/FAN stage).
Necessarily, taxpayers must be afforded the appropriate time and opportunity to present their side within the time prescribed by law. Thus, the BIR can only issue the FLD/FAN upon receipt of the taxpayer’s reply to the PAN or the lapse of the 15-day period without the taxpayer having submitted a response. The Court found support in its more recent ruling in G.R. No. 222476 dated May 5, 2021, which set aside the fact that the taxpayer was able to submit a “well-prepared protest letter,” and where the Court ruled that the BIR still violated the taxpayer’s right to due process when it issued the FAN ahead of its receipt of the reply to the PAN. While the factual circumstances in the May 2021 case differ from those in the September 2022 case, the Court applied the doctrine analogously which led to a similar conclusion that there is no substantial compliance with the due process requirement if the BIR disregards the 15-day period and issues the FLD/FAN prior to the taxpayer’s submission of a formal reply to the PAN.
The BIR is bound by its very own rules which expressly provide that if the taxpayer fails to reply to the PAN within 15 days from the date of receipt, the FLD/FAN is to be issued calling for the payment of the deficiency taxes, including applicable interests and penalties. The above decisions and existing BIR guidelines pretty much sum up the requirement that the FLD/FAN shall be issued only upon receipt of the reply to the PAN or the expiration of such time to respond, in order to afford due process to the taxpayer.
Indeed, there are no shortcuts when it comes to procedural due process requirements because basic rights are on the line. We cannot skip one part, proceed to the succeeding steps, and expect a favorable outcome. While both taxpayers and the authorities strive to come to a resolution despite competing objectives — taxpayers wanting to reduce the assessments to those deficiency taxes which are rightfully due to the government on one hand, and the BIR achieving its tax collection targets to support government programs on the other — it is never an option to disregard procedural requirements at the expense of the other. Of course, this must work both ways: first, by giving the tax authorities sufficient time and basis to issue assessments and enforce collections; and second, by granting taxpayers the opportunity to present their side within the time prescribed by the rules. At the end of the day, due process should and must always be afforded to whomever it is due.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Mary Rose Lara is a manager at the Tax Services department of Isla Lipana & Co., a Philippine member firm of the PwC network.
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mary.rose.lara@pwc.com