Reclaiming compromise payments

In the context of tax assessments, the Bureau of Internal Revenue (BIR) offers remedies for taxpayers with assessed deficiency taxes. Under Section 204 of the National Internal Revenue Code (NIRC), as implemented by Revenue Regulation (RR) 30-2002, instances when the BIR may compromise the payment of deficiency tax include doubtful validity of the delinquent account or disputed assessment, and financial incapacity of the taxpayer.

However, a recent case raised a critical question: Can a compromise settlement be refunded?

In a 2023 Court of Tax Appeals (CTA) case, a domestic corporation (petitioner) seeks a refund of a compromise amount paid, representing 25 percent of the basic deficiency value-added tax (VAT) on an assessment for the taxable year (TY) 2008, against the Commissioner of Internal Revenue (CIR) (respondent). The petitioner argues that the prerequisites for a refund have been met, namely: (1) timeliness of its administrative and judicial claims for refund, and (2) internal revenue taxes sought to be refunded were illegally and erroneously collected by the BIR.

On the contrary, the respondent argues that the petitioner offered a compromise settlement for the VAT assessment, which the BIR accepted, as supported by the Certificate of Availment (COA) and Authority to Cancel Assessment (ATCA).

According to the respondent, having entered into a valid compromise agreement, there is no longer a tax dispute, and the petitioner lacks a cause of action before the court. The respondent further argues that the Final Assessment Notice (FAN) was issued, has attained immutability since the petitioner failed to file a valid administrative protest thereto and that the deficiency VAT assessment is supported by factual and legal grounds.

Let us now discuss the Court’s rulings. The Court notes that the petitioner met the deadline for filing both administrative and judicial claims for refund.

Further, the Court found no perfected compromise agreement between the petitioner and the BIR, emphasizing the absence of consent as required by Article 1318 of the Civil Code. It is true that the petitioner initially filed and paid for a compromise settlement. However, through a subsequent filing of an administrative claim for refund, the petitioner expressed intention to withdraw its previous compromise offer. Moreover, while the respondent issued a COA representing approval of the BIR National Evaluation Board (NEB) on the compromise settlement and an ATCA was likewise issued covering the assessment, no conclusive proof of petitioner’s knowledge of the BIR’s acceptance was presented. According to the petitioner, they were only informed about the COA and ATCA during the respondent’s witness presentation.

The Court also notes the BIR’s failure to issue a necessary Letter of Authority (LOA) for the audit and examination of the taxpayer, since only a Letter of Notice (LN) was issued. Revenue Memorandum Circular (RMC) 40-2003 considers an LN as a notice of audit or investigation only for the purpose of disqualifying the taxpayer from amending his returns. Moreover, Revenue Memorandum Order (RMO) 32-2005 requires the conversion of the previously issued LN to an LOA.

Since an LN serves a different purpose than an LOA, the case in question, through a previous Supreme Court (SC) case, listed the crucial differences between an LN and an LOA as follows:

1. An LOA addressed to a revenue officer is specifically required under the NIRC before conducting an examination of a taxpayer, whereas an LN is not mentioned in the NIRC and serves solely to notify the taxpayer of an identified discrepancy based on the BIR’s RELIEF System.

2. An LOA is valid only for 30 days from the date of issue while an LN has no such limitation. [Please note that this validity period was removed by RMC 82-2022.]

3. An LOA gives the revenue officer only a period of 120 days from receipt of LOA to conduct his examination of the taxpayer, whereas an LN does not contain such a limitation. (Please note that the number of days for investigation has already been updated under RMO 06-2023.)

In relation to the SC case, the BIR issued RMC 75-2018 emphasizing the mandatory nature of an LOA, without which constitutes a violation of the taxpayer’s right to due process; and prohibits revenue officers to practice assessment functions and proceedings. Any examiner or revenue officer initiating tax assessments or performing assessment functions without an LOA shall be subject to appropriate administrative sanctions.

Considering that there was no LOA issued and the FAN was only based on an LN, the respondent has no prior legal permission to conduct the audit. Additionally, the obligation to pay the deficiency VAT did not arise. Since the due date in the assessment notice for VAT was left blank, there is an absence of demand for payment. In a related case, tax assessments lacking due dates in the FAN were nullified.

In conclusion, the Court granted the refund of compromise, ruled in favor of the petitioner, considering the timely submission of refund claims, absence of a perfected compromise agreement and the invalidity of the deficiency VAT assessment due to the BIR’s failure to issue a necessary LOA. Despite the relief solution provided by the BIR, companies can reclaim compromise settlements erroneously paid by adhering to BIR regulations. By staying vigilant and following proper procedures, taxpayers can navigate the complexities of tax assessments and seek recourse when necessary, ensuring fair and just outcomes in their dealings with the BIR.

Gerardo Calangian Jr. is a Tax Associate from the Tax Group of KPMG in the Philippines (R.G. Manabat & Co.), a Philippine partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. The firm has been recognized as a Tier 1 in Transfer Pricing Practice and in General Corporate Tax Practice by the International Tax Review. For more information, you may reach out to tax associate Gerardo L. Calangian Jr. or partner Leandro Ben M. Robediso through [email protected], social media or visit www.home.kpmg/ph.

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 in the Philippines.