Prima facie correctness of a tax assessment: When does it not apply?

Tax assessments by the Bureau of Internal Revenue (BIR) for alleged tax deficiencies are, in most cases, presumed correct; the taxpayer always bears the burden of proving that the correct taxes have been paid and that the BIR’s assessment is incorrect.

This presumption has to do with the established rule in taxation that assessments for alleged tax deficiencies are prima facie presumed correct and made in good faith or accepted as correct until disproved. This essentially signifies that, once a tax assessment is made, the taxpayer has to pay the tax deficiencies, unless they prove otherwise.

In contrast with the norm established in courts that one who alleges must prove their assertions, once a final assessment notice is presented as evidence with the presumption of correctness attached to it such is sufficient to prove that a taxpayer owed taxes to the government. To invalidate the presumption and to avoid a decision in favor of the BIR, the taxpayer must prove that the assessment was issued blatantly without any factual and legal basis.

The presumption of correctness was coined to balance the self-assessing system of internal revenue taxes in the Philippines. Logic dictates that, if a taxpayer has the control to determine his tax liability, it follows that they have all the means to prove that their computation is correct.

Lately, however, the Court of Tax Appeals (CTA) has appeared to depart from this approach and require the BIR to present sufficient evidence as basis for its assessment. The CTA has compelled the BIR to provide evidence to show that its assessment is founded on facts and law. It seems the CTA, in a sense, is relieving the taxpayer of the burden of proof and shifting to the BIR the initial burden of proving the existence of undeclared taxable income.

Taking the case of Commissioner of Internal Revenue (CIR) vs. G&W Architects, Engineers and Project Consultants, Co., (CTA EB Case No. 1572, Feb. 23, 2018), wherein the CTA pronounced that the assessment was being based on unverified information, it could not recklessly take it hook, line, and sinker, absent of any substantiation. The CTA continued that the reliability of the CIR’s assessment is questionable, on account of the CIR’s failure to show that he complied with the guidelines set forth in RMO No. 46-04, which requires the execution and presentation of sworn statements from third-party informants to attest to the veracity of the schedules and data on which the assessment is based. Finally, the CTA held that a presumption that under-declared purchases translated and would automatically result in profit, undeclared income, or additional taxable sales that would, in turn, increase taxpayer’s income tax.

Furthermore, VAT liability is not adequate to uphold the correctness of an assessment. An assessment must be based on facts. The presumption of the correctness of the assessment being a mere presumption cannot be made to rest on another presumption, no matter how reasonable or logical the said presumptions may be.

In another recent CTA case of Keansburg Marketing Corp. vs. Commissioner of Internal Revenue (CTA Case No. 9076, Jan. 5, 2018), the CTA elaborating on a case decided by the Supreme Court had the occasion to explain that, while as a rule, assessments by tax examiners are presumed correct and made in good faith, prima facie correctness of a tax assessment does not apply upon proof that an assessment is utterly without foundation, meaning that it is arbitrarily and capriciously made. The CTA held that, if the BIR has come out with a “naked assessment” or an assessment without any foundation in character, the determination of the tax due is without rational basis. Accordingly, the assessment on the alleged undeclared sales cannot be sustained, since it was based on admittedly unverified amounts extracted from BIR’s own database.

A taxpayer has a remedy when confronted with a tax assessment. If the taxpayer produces sufficient evidence to demonstrate that the assessment is either utterly without foundation or established from another presumption, the presumption of correctness vanishes and the burden of proof shifts to the BIR. It is then incumbent upon the BIR to produce evidence tending to show that the taxpayer has not accurately reported all its income, resulting in reduced tax liabilities. The presumption of the correctness of the tax assessment is not always true.

Although the CTA has provided the taxpayer an antidote to disprove tax assessments, this does not mean that a taxpayer should be complacent. The situations discussed earlier are mere exceptions to the general rule that tax assessments are presumed correct. Taxpayers should always maintain their records and documents to ensure that, once an assessment is made, they can easily retrieve their records and disprove the assessments.

Francis B. Rebuldela, Jr. is an associate 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.

As published in The Manila Times, dated 22 May 2018