Handling Tax Controversy

InPhilippines
2013 Edition






Handling Tax Controversy In Asia Philippines




Baker & McKenzie 1
Table Of Contents
Philippines ............................................................................................ 3
Introduction .................................................................................... 3
1. Practical Aspects Of Tax Litigation .................................. 4
2. Pros & Cons Of Tax Litigation ......................................... 4
3. Constitutional Issues ......................................................... 5
Tax Audits ...................................................................................... 6
1. Selection Of Tax Audit Targets ........................................ 6
(a) Mandatory Cases ........................................................ 6
(b) Top Priority Taxpayers ............................................... 7
(c) Other Priority Taxpayers ............................................ 8
(d) Revenue District Officers Discretion ........................ 9
2. Advance Preparation For Tax Audits ............................... 9
3. Procedures During A Tax Audit ..................................... 10
(a) Commencement Of Audit ........................................ 10
(b) Records To Be Inspected .......................................... 11
(c) Informal Conference ................................................. 12
(d) Preliminary Assessment Notice ................................ 13
(e) Formal Letter Of Demand And Assessment
Notice ....................................................................... 14
4. Limitations Period For Assessment ................................ 15
5. Information Gathering Powers ........................................ 17
(a) General Powers To Demand Information ................. 17
(b) Search Warrants ....................................................... 17
(c) Limits On Powers ..................................................... 18
(d) Record Keeping Obligations .................................... 18
(e) Legal Privilege ......................................................... 18
6. Possibility Of Resolving Controversies Through
Settlement ....................................................................... 19
7. Strategies For Dealing With Tax Audits ......................... 21
Tax Disputes & Litigation ........................................................... 22
1. Dispute/Litigation Procedures ........................................ 22
(a) At The Administrative Level .................................... 22
(b) Jurisdiction Of The Court Of Tax Appeals .............. 23





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(c) Commencement Of Appeal To The CTA ................ 25
(d) Procedure In The CTA ............................................. 26
2. Alternative Dispute Resolution ....................................... 29
Miscellaneous .............................................................................. 29
1. Payment Of Tax .............................................................. 29
2. Penalties & Interest ......................................................... 30
(a) Penalties ................................................................... 30
(b) Interest ...................................................................... 30
(c) Compromise Penalty ................................................ 30
3. Remedies Of The Government For The Collection Of
Delinquent Taxes ............................................................ 31
4. Remedy Of Injunction To Restrain Collection Of
Taxes ............................................................................... 32

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Baker & McKenzie 3
Philippines
Introduction
Tax litigation in the Philippines may be regarded as the taxpayers last
recourse in battling out baseless tax assessments and avoiding the
payment of alleged deficiency taxes. Bringing a case to the Court of
Tax Appeals (CTA) is usually resorted to by taxpayers when efforts to
contest or settle a tax assessment at the administrative level or within
the Bureau of Internal Revenue (BIR) have proven fruitless. Resort to
tax litigation becomes significantly more important considering that
governments fiscal targets are rising, and tax examiners and revenue
district offices have exhibited an aversion to decide on settlement
offers based on the merits of the case.
Under Philippine laws, a final tax assessment issued by the BIR must
be appealed against (to the BIR) within a certain time period;
otherwise, the assessment will become final. Moreover, in case of an
unfavorable decision or inaction by the BIR on an appeal against an
assessment, the taxpayer must pursue a further appeal to the CTA also
within the statutory prescriptive period; otherwise the tax assessment
shall likewise be final.
In the event the taxpayer fails to contest the tax assessment with the
BIR or to appeal an adverse decision or inaction of the BIR to the
CTA, the BIR may proceed to enforce collection of the assessed taxes,
through administrative and/or judicial remedies, and the taxpayer
would have lost the ability to attack the assessment (no matter how
baseless and whimsical it may be).
This chapter explains the relevant laws, rules and regulations that
relate to tax controversies in the Philippines from tax audits, to
administrative tax assessments and finally to judicial appeals and
also provides some insights of steps to be taken when a taxpayer is
confronted with a tax controversy.





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1. Practical Aspects Of Tax Litigation
A taxpayers propensity to litigate a tax controversy arises more out of
necessity than practicality. The taxpayers failure to appeal to the
CTA an unfavorable decision or inaction of the BIR will render the
assessment final, and would enable the BIR to take administrative
remedies to enforce collection, such as the issuance of warrants of
distraint and levy on the personal and real properties of the taxpayer,
as well as the garnishment of the taxpayers bank accounts. Failing to
litigate or to settle could therefore be financially disastrous for the
taxpayer.
A difficulty often encountered in tax litigation, however, is the lack of
documentary evidence as well as of personnel who are knowledgeable
of the accounting practices and transactions subject of the controversy.
Because the administrative and judicial proceedings can drag on,
taxpayers find themselves in a situation where personnel who knew of
the relevant transactions are no longer available to shed light or to
testify.
2. Pros & Cons Of Tax Litigation
The significant advantage of tax litigation is that it allows the taxpayer
to obtain an independent review of his tax case from an impartial court
of justice.
The revenue examiners are burdened with steep revenue collection
targets, which they need to collect in a given fiscal year, and are faced
with the threat of dismissal from service in case of underperformance.
This is under a law (commonly referred to as the Attrition Law) which
seeks to enhance collections of the BIR and, at the same time, to
punish the underachieving examiners. More often than not, examiners
tend to issue incredibly huge assessments which have no factual or
legal basis, mistakenly hoping that taxpayers will immediately settle.
While the rules prescribe a procedure within the BIR for appealing
against tax assessments, it seems unlikely and rare that the BIR will
allow the appeal, reverse its examiners and cancel the assessments.
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Baker & McKenzie 5
Thus, the general perception is that an impartial review of the tax
assessment cannot be had administratively, and hence, the need for an
objective review of tax cases by the courts. On the other hand, the
disadvantages that can be noted are (i) the time and expense involved
in tax litigation and (ii) in the event the taxpayer loses the case,
interest (20% per annum) on the unpaid tax is imposed, computed
from the time the tax assessments were originally due until the
taxpayer fully pays the tax.
3. Constitutional Issues
Due Process Of Law
Sec. 1 Art. III of the Philippine Constitution provides in part that
(n)o person shall be deprived of life, liberty, or property without due
process of law.
The due process clause of the Constitution has 2 aspects substantive
and procedural.
Relevant to tax audit and litigation is procedural due process, which
states that a taxpayer can be made to pay taxes (and thereby deprived
of his property), provided that the remedies and procedures set forth
under the law are duly observed, and, hence, the taxpayer is accorded
due process.
The law provides procedures for making and issuing assessments
(discussed in detail below). These procedures must be strictly
observed by the government in making an assessment. Failure to
observe such procedure may amount to deprivation of the taxpayers
right to due process. In such a case, the taxpayer may seek redress
from the courts and have the tax assessment declared null and void.





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Tax Audits
1. Selection Of Tax Audit Targets
Tax audits in the Philippines are based on selection criteria that are set
our yearly by the Commissioner of Internal Revenue in an annual
audit program. Taxpayers who are targets of audit are classified into 4
categories: (i) mandatory cases; (ii) top priority taxpayers; (iii) other
priority taxpayers; and (iv) revenue district officers discretion.
For instance, under the 2009 Audit Program, [Note: This is still the
latest audit program of the BIR.], the taxpayers/cases under each of
the foregoing 4 categories are:
(a) Mandatory Cases
taxpayers with claims for and income tax refund or issue of a tax
credit certificate or income tax returns showing carry-over of
excess withholding tax/income tax payments, where the amount of
claim or carry-over exceeds P100,000 and/or where the gross
sales/receipts exceed P10m (P5m in certain cases), which will
require the audit/investigation of all internal revenue tax liabilities
for the covered period
taxpayers with claims for a value-added tax (VAT) refund or issue
of a tax credit certificate or VAT returns showing excess input tax
at the end of the taxable period where the amount exceeds
P100,000, which will require the specific audit/investigation of
the VAT liabilities only for the covered period
estate tax returns with other tax liabilities where the gross
sales/receipts from business or the gross estate exceeds P10m
(P5m in certain cases)
estate tax returns with no other tax liabilities where the gross
estate exceeds P10m (P5m in certain cases)
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Baker & McKenzie 7
request for tax clearance of taxpayers due to retirement/cessation
of business with gross assets or gross sales/receipts exceeding
P10m, which will require the audit/verification of all internal
revenue tax liabilities for the immediately preceding year and the
year of retirement of the taxpayer pursuant to Section 52 (C) of
the Tax Code of 1997
request for tax clearance of taxpayers undergoing
merger/consolidation/split-up/spin-off and other types of
corporate reorganizations with gross assets or gross sales/receipts
exceeding P10m, which will require the audit/verification of all
internal revenue tax liabilities for the immediately preceding year
and the year of corporate reorganization of the taxpayer,
specifically, those who will cease to exist
(b) Top Priority Taxpayers
These include the following taxpayers whose gross sales/receipts
exceed P5m (P3m in certain cases):
review centres
corporations accredited by TESDA
health providers
hospitals
nursing schools
call centres
restaurants, food chains and catering services
construction companies





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taxpayers engaged in the leasing industry (for example, lessors of
residential houses/apartments/condominiums and commercial
spaces, parking lots, boarding houses, pension houses)
non-stock non-profit corporations/organizations and foundations
cooperatives
lending investors Under Philippine law, lending investors are
persons other than banks, non-bank financial intermediaries,
finance companies and other financial intermediaries not
performing quasi-banking functions who make a practice of
lending money for themselves or others at interest.
pawnshops
real estate dealers/developers
hotels and other tourism-related establishments, including resort
operators
retail/wholesale trade
dealers of agricultural products and supplies
logistics providers (e.g., arrastre, stevedoring, freight, trucking
and courier services)
contractors of government agencies, instrumentalities, local
government units and government corporations
taxpayers who failed to submit the required Summary List of
Sales and Purchases for at least one (1) quarter
(c) Other Priority Taxpayers
taxpayers who are reporting/filing No Operations in their annual
income tax returns where, after conduct of an rudimentary
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Baker & McKenzie 9
inspection, it is determined that a business exists and the volume
of business transactions warrants audit
taxpayers with income tax due of less than 2% of gross
sales/receipts or total VAT due of less than 3% of gross
sales/revenues
taxpayers reporting a net loss or no taxable income in their tax
returns
taxpayers who are included in the nationwide list of top 20,000
private corporations under the jurisdiction of the respective
Revenue District Offices
(d) Revenue District Officers Discretion
The Revenue District Officer may select taxpayers which do not fall
within the guidelines established above for audit, but the total number
of selected audit candidates may not exceed 25% of the total number
of taxpayers to be audited by the district office (other than mandatory
cases).
2. Advance Preparation For Tax Audits
The best way to manage and prepare for tax audits is still preventive
planning, rather than remedial action.
This can be done by putting in place policies, practices and procedures
which are aimed at strict compliance with the tax laws and
regulations. A taxpayer should have a sound accounting system and
compliance procedures in place with regard to recording and booking
transactions, producing financial reports and other relevant
documents, computing the taxes payable, preparing tax returns and
other tax filings.
If possible, the taxpayer should have a compliance officer who will
handle the tax compliance matters of the business. The tax compliance
officer should be aware of the current tax laws.





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3. Procedures During A Tax Audit
(a) Commencement Of Audit
The tax audit and assessment process begins with the issue by the BIR
of a Letter of Authority (LOA). A LOA authorizes a revenue
examiner of the BIR to conduct an audit/investigation and examine the
books of accounts and accounting records of a taxpayer for the
possible assessment of deficiency taxes and penalties.
All tax audits/investigations of taxpayers must necessarily be covered
by an LOA issued by either the Commissioner of the BIR or his
regional directors. Otherwise, the audit/investigation is void.
A revenue examiner acting under a LOA must conduct the audit and
submit an investigation report within 120 days from the date of the
issuance of the LOA. If the final report is not completed within the
120-day period, the revenue examiner must return the LOA for
revalidation. Only one revalidation may be made, and this is done by
issuing a new LOA.
Pursuant to the LOA, the revenue examiner will first request the
taxpayer, in writing, to make available for inspection the relevant
books of accounts, accounting records and particular documents, and
will indicate the time and date when the records should be made
available. If at the appointed time the documents are not presented, the
revenue examiner should seek an explanation and again make a
written request. If, for the second time, the taxpayer fails to present
the required records, the revenue examiner must request an
explanation in writing, signed by the taxpayer, as to why the records
are still unavailable. Thereafter, the revenue examiner, in consultation
with supervisors, should submit a written report, pinpointing the
records not made available, the taxpayers officers who are liable, and
the cause of the unreasonable and/or unnecessary delay in the
investigation. Finally, the Division Chief or the Revenue District
Officer will forward the case to the Chief of the Prosecution Division
or the legal branch for the issuance of a subpoena to order the
production of the documents, or the filing of the case in court.
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(b) Records To Be Inspected
In tax audits or investigations, the revenue examiners generally
examine the documents submitted by the taxpayer such as the returns
and other tax filings, the audited financial statements (AFS), the trial
balance, and other documents/schedules/reconciliations they deem
necessary and request in the course of the examination.
The revenue examiners typically verify whether the amount of taxable
items in the tax returns and the rate used in computing the tax are
correct in the circumstances. Moreover, they check whether the
amounts of expenses reported in the AFS are reflected in or
substantiated, i.e., the income payments/expenses claimed as expenses
in the AFS were duly subjected to proper withholding tax as per
withholding tax returns. In addition, the revenue examiners usually
determine whether a taxpayers claimed deductions in the returns are
appropriate and allowable under the law.
The following are the documents requested of taxpayers during tax
audits:
previously issued letters of authority / tax verification notices and
deficiency tax payments, if any
income tax return with all the required attachments including
audited financial statements for the taxable year under audit
previous years income tax return with all the required
attachments including audited financial statements
quarterly income tax returns including attachments with bank
official receipts, if with payment
monthly and annual information returns on withholding taxes, i.e.,
expanded, compensation and final, including alpha listing and
bank official receipt





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monthly and quarterly value added tax returns, including summary
list of sales and purchases with bank official receipts
proof of payment of documentary stamp tax on subscribed capital
stock
working papers showing monthly totals of nominal and real
accounts
trial balance
copies of lease contract/agreement
latest copy of general information sheet submitted to Securities
and Exchange Commission
The following records should be ready for examination at the
taxpayers office:
general ledger
sales and purchase book
subsidiary sales and purchase book
sales invoices and other receipts
checks and journal vouchers
other related records
(c) Informal Conference
If after the audit/investigation the revenue examiner determines that
the taxpayer is liable for any tax, he must make a written report of his
findings and notify the taxpayer. If the taxpayer does not agree, in
whole or in part, with the findings, the revenue examiner must notify
and invite the taxpayer (through its representatives) to an informal
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Baker & McKenzie 13
conference in order to give the latter the opportunity to present its side
of the case. If the taxpayer fails to respond to the notice of informal
conference within 15 days, it is considered in default, and the case is
then sent to the Assessment Division of the BIR for appropriate
review and the issuance of a deficiency tax assessment.
(d) Preliminary Assessment Notice
If, after the review and evaluation of the case, the Assessment
Division determines that there exists sufficient basis to assess the
taxpayer for any deficiency tax, a preliminary assessment notice
(PAN) will be issued. The PAN must state in detail the facts, law,
rules and regulations upon which the assessment is based.
The issuance of a PAN is not necessary, and the BIR may proceed
with the issuance of a final assessment notice under the following
circumstances:
when the finding of any deficiency tax is a result of a
mathematical error in the computation of the tax appearing on the
face of the tax return filed by the taxpayer
when a discrepancy has been found to exist between the tax
withheld and the amount actually remitted by the withholding
agent
when a taxpayer who opted to claim a refund or tax credit of
excess creditable withholding tax for a taxable period is found to
have carried over and automatically applied the same amount
claimed against the estimated tax liabilities for the taxable quarter
or quarters of the succeeding taxable year
when the excise tax due on excisable articles has not been paid
when an article locally purchased or imported by an exempt
person, such as, but not limited to, vehicles, capital equipment,





14 Baker & McKenzie
machineries and spare parts, has been sold, traded or transferred to
non-exempt persons
(e) Formal Letter Of Demand And Assessment Notice
If the taxpayer fails to respond within 15 days from date of receipt of
the PAN, it will be considered to be in default, and a formal letter of
demand and Final Assessment Notice (FAN) will be issued.
A FAN is a written notice and demand made by the BIR on the
taxpayer for the settlement of a tax liability that has been definitely
determined. It must state the facts, law, rules and regulations on which
the assessment is based; otherwise, it is void.
The BIR must issue the FAN within the limitations period provided in
the Tax Code within which the BIR may make an assessment. If the
FAN is issued beyond the limitation period, the assessment is void,
unless a waiver has been validly executed by the parties prior to the
end of the limitations period.
In computing the limitations period, a tax assessment is deemed to be
made when the FAN is released, mailed or sent by the BIR. There is
no requirement that the notice be actually received by the taxpayer
within the limitations.
However, if the taxpayer denies having received the FAN from the
BIR, it is incumbent upon the BIR to prove by competent evidence
that such notice was indeed received by the addressee. The
presumption that a mailed letter is received by the addressee in the
ordinary course of mail is merely a rebuttable presumption that may
be overturned by evidence to the contrary. The moment the taxpayer
denied having received the assessment notice, the burden is shifted to
the BIR to prove receipt of the notice by the former.
The taxpayer may administratively appeal against the FAN within 30
days from the date of receipt by filing a request for reconsideration or
reinvestigation. This is referred to as a protest procedure. The taxpayer
must state the facts, the applicable law, rules and regulations upon
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Baker & McKenzie 15
which the protest is based; otherwise, the protest will be void and
without force and effect.
The taxpayer must submit the required documents in support of its
protest within 60 days from date of filing of the protest; otherwise, the
assessment will become final.
4. Limitations Period For Assessment
The period within which the BIR may conduct tax audits follows the
limitations period provided under the Tax Code. The BIR has 3 years,
from the date prescribed by law for filing of the return or the date of
actual filing of the return, whichever is later, within which to issue an
assessment. Beyond the 3-years period, the BIR may no longer
conduct an audit and issue an assessment.
However, in case of false or fraudulent return with intent to evade tax
or of failure to file a return, the tax may be assessed within 10 years
from the discovery of the falsity, fraud or omission.
The limitations period is suspended in the following cases:
If the Commissioner is prohibited from making the assessment or
beginning distraint or levy or a proceeding in court, and for 60
days thereafter
If the taxpayer requested a reinvestigation which was granted by
the Commissioner
If the taxpayer cannot be located in the address given by him in
the return filed upon which a tax is being assessed or collected
If the warrant of distraint is duly served upon the taxpayer, and no
property could be located
If the Commissioner and the taxpayer agree in writing to waive
the limitations period.





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A waiver of the limitations period suspends the running of the
limitations period, and is a waiver by the taxpayer of a right granted to
him by law. Hence, for a waiver to be valid, the waiver must strictly
comply with the requirements provided in the pertinent tax
regulations. Otherwise, the waiver will not be effective. It bears noting
that quite a number of tax cases have been won by taxpayers based on
findings that waivers were defective.
The requirements for a valid waiver are:
the waiver must be in the prescribed form; no deviation is
permitted
it must contain the expiry date of the period agreed upon to
assess/collect the tax after the regular three-year limitations period
it must be signed by the taxpayer himself or his duly authorized
representative; In the case of a corporation, the waiver must be
signed by one of its responsible officials
after the waiver is signed by the taxpayer, the Commissioner of
Internal Revenue or a revenue official authorized by him must
sign the waiver indicating that the Bureau has accepted and agreed
to the waiver. The date of such acceptance by the Bureau should
be shown.
both the date of execution by the taxpayer and date of acceptance
by the BIR should be prior to the expiration of the limitations
period (or before the lapse of the period previously agreed upon in
case a subsequent agreement is executed)
the waiver must be executed in 3 copies, the original copy to be
attached to the docket of the case, the second copy for the
taxpayer and the third copy for the officer accepting the waiver.
The taxpayers receipt of his/her file copy must be indicated in the
original copy.
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Baker & McKenzie 17
5. Information Gathering Powers
(a) General Powers To Demand Information
Under the Tax Code, the Commissioner of the BIR, or his
representative (in ascertaining the correctness of any return filed by
the taxpayer or in determining his liability for any tax) has the power
to examine any book, paper, record or other data of a taxpayer
relevant or material to the inquiry, and to summon him, or any of his
officer or employee who has custody of the books of accounts and
other accounting in order to produce the same at the time and place
specified in the summons. The summons is referred to as subpoena
duces tecum
Failure to obey summons, or to appear and produce books of accounts
and other required information, is punishable by a fine of not less than
PhP5,000.00 but not more than P10,000.00 and imprisonment of not
less than 1 year but not more than 2 years.
(b) Search Warrants
As a rule, search warrants may be issued only by a court judge (upon
application therefore by one party) after it is established that there is
reasonable evidence that an offense has been committed, and that the
objects sought in connection with the offense are in the place sought
to be searched.
Since non-payment and evasion of taxes is a criminal offense,
theoretically, the BIR may apply for a search warrant provided it is
able to establish to the satisfaction of a court judge by reasonable
evidence that tax evasion has been committed and the objects, i.e.,
books of accounts, and other accounting records, sought in connection
with it are in the place to be searched.
Note that issuance of a search warrant presupposes that an offense has
been committed, in contrast to a subpoena duces tecum, which the
BIR may issue even when it is merely auditing and examining the
taxpayer, and without any finding yet of commission of an offense.





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Note further that issuance of search warrants is not resorted to by the
BIR in obtaining books of accounts and other information from the
taxpayer. It appears that obtaining taxpayer information through
issuance of subpoena duces tecum is sufficient for the BIR to exercise
its power to gather information.
(c) Limits On Powers
The limitation on the power of the BIR to examine any book, paper,
record or other data, or to summon the taxpayer or any other person to
produce them, is that said book, paper or record sought to be
examined should be relevant or material to BIRs inquiry or
investigation (i.e., ascertaining whether tax returns are filed and
proper taxes are paid).
(d) Record Keeping Obligations
Under the Tax Code, taxpayers must keep books of accounts and other
accounting records during the 3-year period within which the BIR
may make an assessment. Failure to keep books of accounts and other
accounting records is punishable by a fine of not less than
PhP50,000.00 but not more than PhP100,000.00 and imprisonment of
not less than two years but not more than four years.
(e) Legal Privilege
Under the Rules of Court, a tax advisor who is a lawyer cannot be
examined in court as to any communication made by client to him, or
his advice given thereon in the course of, professional capacity. This
is known as the attorney-client privilege.
Attorney-client privilege exists when legal advice is sought from an
attorney in his professional capacity with respect to communications
made in confidence by the client to him, such that said
communications are permanently protected from disclosure, except
when waived by the client.
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Baker & McKenzie 19
There is no such similar privilege under the Rules of Court with
respect to communications made by client to his accountant or auditor.
6. Possibility Of Resolving Controversies Through Settlement
As a rule, as the stage of the audit/assessment proceeding progresses
from tax audit, to informal conference, to issuance of final assessment
the more difficult it becomes to arrive at a mutually agreed
settlement and cancellation of the assessment. The reason is that, as
the proceedings advance from one stage to the next, the BIRs internal
review process becomes stricter and more BIR people become
involved.
For instance, during tax audits, the taxpayer will only have to deal
with the revenue examiners. After preliminary or final assessments are
issued, the officers at the assessment division, the revenue district
officer and the regional director would have been involved. Thus, it is
better to negotiate a settlement with the BIR during the early stages of
the audit.
Settlement simply means that the taxpayer will concede certain
findings of the revenue examiners or that the parties will agree on the
correct amount of an income or expense item that is at issue, and any
deficiency tax will be paid. Normally, these involve items where the
taxpayer actually erred and there is indeed a liability for taxes. In
exchange for paying these items, the revenue examiner on the other
hand will agree to cancel other findings. In a simple sense, settlement
involves give and take.
A taxpayer may also agree to pay deficiency tax on certain items,
usually of nominal amounts, even if such items are fully defensible.
The reason may be that the administrative cost of preparing
documentary support for these items may not justify pursuing the
amount of deficiency tax. Taxpayers likewise consider the expenses
likely to be incurred, i.e., fees to legal advisors, in the event the case
drags on.





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As stated above, as the proceedings move from one stage to another,
the more difficult it is will become to settle the assessment with the
BIR. Tax assessments can still be settled after they are issued, but
settlement at this level will likely require the approval of the revenue
district officer and head of the assessment division.
The assessment may also be settled through compromise and
abatement (discussed below).
Once the matter has progressed to judicial appeal before the CTA, it
may still be settled by the taxpayer either through (i) compromise and
(ii) abatement of penalties.
A compromise allows the taxpayer to pay less than the total amount of
tax assessed. The taxpayer must apply to the BIR on the ground that:
(i) there is reasonable doubt as to the validity of the claim against the
taxpayer; or (ii) the financial position of the taxpayer demonstrates a
clear inability to pay the assessed tax. For cases of financial
incapacity, the minimum compromise rate is 10% of the assessed tax;
for other cases, a minimum compromise rate is 40% of the assessed
tax.
Where the tax involved exceeds P1m or where the settlement offered
is less than the prescribed minimum rate, the compromise is subject to
the approval of the Evaluation Board which is composed of the
Commissioner and the 4 Deputy Commissioners.
On other hand, abatement of penalties (as the name implies) means
the cancellation of penalties imposed on top of the assessed tax. The
penalties consist of the 25% surcharge, 20% interest per annum and
the compromise penalty. A taxpayer applying for abatement must still
pay 100% of basic assessed tax. Grounds for application for
abatement are: (i) the tax or any portion thereof appears to be justly or
excessively assessed; or (ii) the administration and collection costs
involved do not justify the collection of the amount due.
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Baker & McKenzie 21
Moreover, there has to be an administrative issuance which allows the
application for abatement of penalties. As of date, there is no existing
BIR issuance which allows abatement. All other earlier abatement
issuances have expired.
7. Strategies For Dealing With Tax Audits
Please see discussion under the heading Tax Audits
In addition thereto, the following are recommended:
the taxpayer should establish good rapport with the revenue
examiners. He should treat them with utmost respect and courtesy.
In this way, the revenue examiners can be expected to act more
objectively and without prejudice
the taxpayer should attend to the audit well prepared. He must be
able to answer the questions of revenue examiners with proficient
knowledge of his business and its practices and procedures, and
with a good understanding of pertinent tax laws and regulations. If
possible, he should be assisted by a tax advisor. In this way, the
possibility of absurd assessment is slim because the taxpayer can
immediately object to clearly erroneous assessments
the taxpayer should limit the submission of documents/records to
those requested by revenue examiners. Less information in the
hands of revenue examiners will mean fewer bases for possible
tax assessments. However, if additional documents need to be
submitted in order to clarify issues and to support a position, i.e.,
reconciliations and summaries, the taxpayer should volunteer
them to the examiners.





22 Baker & McKenzie
Tax Disputes & Litigation
1. Dispute/Litigation Procedures
(a) At The Administrative Level
As discussed under the heading Tax Audits, the taxpayer has the
opportunity to contest the findings of tax assessments of the BIR
examiners at every stage of the tax audit and administrative
assessment process from informal conference (3[c]), to the issuance
of PAN (3[d]), and to the issuance of FAN (3[d]).
To summarize, if after a tax audit/investigation, the revenue examiner
determines that the taxpayer is liable for any tax, he will invite the
taxpayer (through its representatives) to an informal conference in
order to allow the taxpayer an opportunity to present its case. If the
taxpayer is able to sufficiently establish that the findings of
assessment are indeed without basis, the same may (subject to review
of higher authorities) be cancelled and the audit terminated.
However, if the taxpayer fails to respond to the notice of informal
conference within 15 days, it is considered in default, and the case is
then sent to the Assessment Division of the BIR for appropriate
review and issuance of a deficiency tax assessment. If, after the
review and evaluation of the case, the Assessment Division
determines that there exists sufficient basis to assess the taxpayer for
any deficiency tax, a preliminary assessment notice (PAN) will be
issued. At this stage, the taxpayer is likewise given the opportunity to
dispute the assessments contained in the PAN within 15 days from the
receipt thereof. For this purpose, the taxpayer must state in its position
paper the facts and the law upon which its position is based. If the
taxpayer is able to sufficiently establish that the assessments contained
in the PAN are without basis, the BIR may agree to cancel them.
However, if the taxpayer fails to respond within 15 days from date of
receipt of the PAN, it will be considered to be in default, and a formal
letter of demand and Final Assessment Notice (FAN) will be issued.
The taxpayer is likewise given the opportunity to dispute the
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Baker & McKenzie 23
assessments contained in the FAN by submitting protest-letter within
30 days from the receipt thereof. The protest-letter must contain the
facts and law upon which the protest is grounded. Also, if the taxpayer
is able to sufficiently establish that the assessments contained in the
FAN are indeed without basis, the BIR may agree to cancel them.
As mentioned, the taxpayers failure to respond to the FAN within 30
days from receipt will render the assessment final and executory.
(b) Jurisdiction Of The Court Of Tax Appeals
The CTA exercise the following powers:
Exclusive jurisdiction to hear appeals against the following:
o decisions of the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties in relation thereto, or
other matters arising under the National Internal Revenue or
other laws administered by the Bureau of Internal Revenue
o inaction by the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties in relations thereto, or
other matters arising under the National Internal Revenue
Code or other laws administered by the Bureau of Internal
Revenue, where the National Internal Revenue Code provides
a specific period of action, in which case the inaction shall be
deemed a denial
o decisions, orders or resolutions of the Regional Trial Courts in
local tax cases originally decided or resolved by them in the
exercise of their original or appellate jurisdiction
o decisions of the Commissioner of Customs in cases involving
liability for customs duties, fees or other money charges,
seizure, detention or release of property affected, fines,





24 Baker & McKenzie
forfeitures or other penalties in relation thereto, or other
matters arising under the Customs Law or other laws
administered by the Bureau of Customs
o decisions of the Central Board of Assessment Appeals in the
exercise of its appellate jurisdiction over cases involving the
assessment and taxation of real property originally decided by
the provincial or city board of assessment appeals
jurisdiction over cases involving criminal offenses:
o exclusive original jurisdiction over all criminal offenses
arising from violations of the National Internal Revenue
Code. Offences or felonies where the principal amount of
taxes and fees, exclusive of charges and penalties, claimed is
less than P1m or where there is no specified amount claimed
are tried by the regular Courts and the jurisdiction of the CTA
in this case is to hear appeals. Any provision of law or the
Rules of Court to the contrary notwithstanding, the criminal
action and the corresponding civil action for the recovery of
civil liability for taxes and penalties must be simultaneously
instituted with, and jointly determined, in the same proceeding
by the CTA, the filing of the criminal action being deemed to
necessarily carry with it the filing of the civil action, and no
right to reserve the filing of such civil action separately from
the criminal action is recognized
exclusive appellate jurisdiction in criminal offences:
i. over appeals from judgments, resolutions or orders of the
Regional Trial Courts in tax cases originally decided by them,
in their territorial jurisdiction.
ii. over petitions for review of the judgments, resolutions or
orders of the Regional Trial Courts in the exercise of their
appellate jurisdiction over tax cases originally decided by the
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Baker & McKenzie 25
Metropolitan Trial Courts, Municipal Trial Courts and
Municipal Circuit Trial Courts in their respective jurisdiction.
jurisdiction over tax collection cases
o exclusive original jurisdiction in tax collection cases
involving final assessments for taxes, fees, charges and
penalties (but collection cases where the principal amount of
taxes and fees, exclusive of charges and penalties claimed is
less than P1m are tried by the Municipal Trial Court,
Metropolitan Trial Court and Regional Trial Court)
exclusive appellate jurisdiction in tax collection cases:
i. over appeals from the judgments, resolutions or orders of the
Regional Trial Courts in tax collection cases originally
decided by them, in their respective territorial jurisdiction
ii. over petitions for review of the judgments, resolutions or
orders of the Regional Trial Courts in the Exercise of their
appellate jurisdiction over tax collection cases originally
decided by the Metropolitan Trial Courts, Municipal Trial
Courts and Municipal Circuit Trial Courts, in their respective
jurisdiction
(c) Commencement Of Appeal To The CTA
If the protest is denied, in whole or in part, by the Commissioner of
the BIR or his duly authorized representative, the taxpayer may lodge
an appeal by filing a petition for review with the CTA (at division
level) within 30 days from date of receipt of the said decision;
otherwise, the assessment will become final.
While the decision of the Commissioner is usually expressed in the
form of a letter to the taxpayer, a civil suit for collection can also be
considered as a denial of the protest of the assessment. If the
Commissioner, without categorically deciding the request for





26 Baker & McKenzie
reconsideration or reinvestigation, proceeds with distraint and levy or
institutes an action in the ordinary courts, such action is deemed to be
implicit denial of the taxpayers protest, and the taxpayers remedy is
to appeal to the CTA.
In case the decision of denial of the BIR is deemed made through the
issuance of a warrant of distraint or levy or civil suit for collection, the
taxpayer, upon filing a petition for review with the CTA, may ask the
court to issue an injunction or order to prevent the BIR from
proceeding with its collection action. As a rule, an injunction is not
available to restrain the collection of internal revenue taxes but, as an
exception, the CTA may issue injunctions against administrative
collection, i.e. by distraint and levy, when collection could
jeopardize the interest of the Government or the taxpayer. The court
may require the taxpayer to post a bond. Ordinary courts may not
issue such an injunction.
If, on the other hand, the Commissioner of the BIR or his duly
authorized representative fail to act on the taxpayers protest within
180 days from date of submission of the supporting documents for the
protest, the taxpayer may likewise appeal to the CTA Division within
30 days from the lapse of the said 180-day period.
(d) Procedure In The CTA
The procedure in the CTA is as follows:
upon receipt by the CTA of the taxpayers petition for review
(petition), it will be docketed and assigned a number. Thereafter,
the petition will be raffled or assigned to one of three divisions of
the CTA
the CTA is composed of a Presiding Justice and 8 Associate
Justices, divided into 3 divisions. Each division is composed of 3
Justices. The CTA at division level hears and decides the case
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Baker & McKenzie 27
once assigned to a particular division, the clerk of court of the
division will issue the necessary summons to respondent BIR
within 15 days from service of summons, the BIR will have to file
an answer to the petition
within 10 days after answer, the BIR must shall certify and
forward to the CTA all the records of the case in its possession,
with the pages duly numbered and, if the records are in separate
folders, then the folders must also be numbered
thereafter, the CTA will set a date for the pre-trial hearing and
order the parties to respectively submit pre-trial briefs
after pre-trial, the trial proper ensues. During the trial, each party
will present testimonial and documentary evidence to support its
case, after which the CTA will require the parties to submit
memoranda. The case will then be submitted for resolution
New Judicial Affidavit Rule
Under the Supreme Court's New Judicial Affidavit Rule ("Rule"),
effective 1 January 2013, in actions and proceedings requiring the
reception of evidence before first and second-level courts,
including appellate courts and quasi-judicial bodies, the parties are
required to submit a judicial affidavit of their witnesses, which
will take the place of the direct oral testimony of the witnesses.
The judicial affidavit, which is in a form of question and answer
(with the documentary exhibits required to be attached), is served
on the adverse party, and submitted to court at least 5 days before
the pre-trial, preliminary conference or the scheduled hearing of
the motions or incidents.
However, the cross-examination of the witness by the adverse
party, as well as his (the witness') re-direct and re-cross
examinations, will be conducted orally in open court.





28 Baker & McKenzie
Failure to submit the judicial affidavit and documentary exhibits
on time will be deemed a waiver of their submission. However, a
party may be allowed to belatedly submit the judicial affidavit
once, provided that the delay is for a valid reason, the adverse
party would not be unduly prejudiced, and the erring party pays a
fine of not less than P1,000.00, but not more than P5,000.00, at
the discretion of the court.
Even prior to this Rule, the use of judicial affidavit (in lieu of
direct oral testimony) has been the practice at the CTA with the
requirement only that it is submitted at least 3 working days
before the scheduled presentation of the witness (as opposed to "at
least 5 days before the pre-trial, preliminary conference or the
scheduled hearing of the motions or incidents" under the new
Rule).
There is a move from among practitioners appearing before the
CTA, and even the CTA itself, to request the Supreme Court to
exempt the court from the new Rule. The reason is that under its
previous judicial affidavit rule, the CTA has been able to speedily
dispose of tax cases. In fact, the CTA is considered to be one of
the most efficient courts in the country today.
if the CTA Division renders a decision denying in whole or in part
the taxpayers petition for review, thereby affirming (in whole or
in part) the BIRs assessment, the taxpayer may file a motion for
reconsideration with the Division within 15 days following the
date of receipt of the notice of decision
if the CTA Division denies the taxpayers motion for
reconsideration, the taxpayer may file an appeal via petition for
review with the CTA sitting en banc (i.e., all 9 Justices) within 15
days following the date of receipt of notice of denial of the motion
for reconsideration
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Baker & McKenzie 29
if the CTA en banc renders a decision adverse to the taxpayer, it
may file a motion for reconsideration within 15 days from date of
receipt of notice of decision
the denial by the CTA en banc of the motion for reconsideration
may be appealed to the Supreme Court via petition for certiorari
within 15 days from receipt of notice of denial
if no appeal or motion for reconsideration or new trial is filed
within the time provided, the judgment or final resolution
becomes final
2. Alternative Dispute Resolution
The Court of Tax Appeals and the Supreme Court, are currently
undertaking the drafting of the rules on a court-annexed mediation in
the Court of Tax Appeals. The draft rules is entitled, Guidelines for
the Implementation of Mediation in the CTA.
Mediation is a process of settling disputes with the assistance of an
acceptable, impartial and neutral third party called a mediator. The
mediator helps parties identify issues and develop proposals to resolve
their disputes. Once the parties have arrived at a mutually acceptable
arrangement, the agreement becomes the basis for the courts decision
on the case.
Court-annexed mediation means a mediation process conducted under
the auspices of a court, after such court has acquired jurisdiction over
the dispute.
Miscellaneous
1. Payment Of Tax
Taxes are paid on or before fixed deadlines, which deadlines vary
depending on the type of tax due. The return is filed and the tax paid
with the Authorized Agent Bank (AAB) of the Revenue District
Office (RDO) having jurisdiction over the place of business of the





30 Baker & McKenzie
taxpayer. In places where there are no AABs, the return shall be filed
and the tax paid with the Revenue Collection Officer or the duly
Authorized City or Municipal Treasurer within the Revenue District
where the taxpayers place of business/office is located.
2. Penalties & Interest
(a) Penalties
Under the Tax Code, in addition to the basic taxes, the failure of the
taxpayer to file tax returns and pay taxes shall result in a liability to
pay surcharge of 25% based on the amount of basic tax. In case of
wilful neglect to file a return within the period prescribed, or in case
of a false or fraudulent return, a surcharge of 50% of the basic tax is
imposed.
In case of deficiency tax assessment (where the taxpayer has actually
filed a tax return, but amount of tax paid is alleged by the BIR to be
deficient), there is also a surcharge of 25% based on the amount of
deficiency tax, if the taxpayer fails to pay the same within the time
prescribed in the notice of assessment.
(b) Interest
Moreover, a deficiency interest of 20% per annum (computed from
the date prescribed for payment of the tax until full payment) is
likewise imposed on the amount of basic tax, where there is failure to
file return and pay the tax on time.
(c) Compromise Penalty
Furthermore, for violations of the Tax Code which are subject to
criminal penalties (such as belated filing of tax returns), the taxpayer
may be required to pay certain amounts as compromise penalties in
lieu of criminal prosecution. The amount of compromise penalty
payable depends on the violation and is determined based on a
schedule of compromise penalties prescribed by the BIR.
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Baker & McKenzie 31
3. Remedies Of The Government For The Collection Of
Delinquent Taxes
The Tax Code provides several remedies for the Philippine
government to enforce the collection of delinquent taxes from
taxpayers in the Philippines.
Distraint Of Personal Property, Levy Upon Real Property, And
Court Action
If the assessment against the taxpayer becomes final, executory and
demandable (i.e., in the event that the Company fails to file an
administrative protest against a deficiency tax assessment made by the
BIR or, if such protest is filed, the protest or a subsequent judicial
appeal thereof is denied), the BIR may effect the collection of the
taxes, including surcharge and interest: (a) by distraint of personal
property, which includes stocks and other securities, debts, credits,
bank accounts, and interest in and rights to personal property, (b) by
levy upon real property and interest in or rights to real property, and
(c) by civil or criminal action. The remedies may be pursued
simultaneously until the full amount of tax liability is collected.
Tax Lien
Moreover, if the taxpayer, after demand, neglects or refuses to pay the
tax assessment, the amount thereof shall constitute a lien on all
property and rights to property belonging to the taxpayer from the
time the assessment is made until fully paid. However, the lien shall
not be valid against any mortgagee, purchaser or judgment creditor
until notice of such lien is filed with the Register of Deeds of the
province or city where the property of the taxpayer is situated. The tax
lien will subsist from the time the tax assessment is made until the
amount of unpaid tax and the accessory liabilities (surcharge, interest
and other penalties) are fully paid.





32 Baker & McKenzie
4. Remedy Of Injunction To Restrain Collection Of Taxes
As a rule, an injunction is not available to restrain the collection of
internal revenue taxes but, as an exception, the CTA may issue
injunctions against administrative collection, i.e. by distraint and levy,
when collection could jeopardize the interest of the Government or
the taxpayer. The court may require the taxpayer to post a bond.
Ordinary courts may not issue such an injunction.

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Baker & McKenzie 33
CONTACT DETAILS
If you wish to receive more information regarding the issues
addressed in this Handbook, please feel free to contact the following
partner of Baker & McKenzie:

Dennis Dimagiba
Tel: +63 2 819 4912
Email: dennis.dimagiba@quisumbingtorres.com

Quisumbing Torres
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26th Street Corner 3rd Avenue
Crescent Park West
Bonifacio Global City
Taguig, Metro Manila
Philippines 1634
Tel: +63 2 819 4700
Fax: +63 2 816 0080

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