Taxpayers’ right to due process: Can a new assessment be raised at the FDDA?

As the world is now facing a coronavirus (COVID-19) pandemic, each of us is reminded by the World Health Organization of the correct procedures for preventing infection, such as frequently washing hands with soap, maintaining social distancing, practicing respiratory hygiene, and seeking medical care early.

This article, on the other hand, would like to remind taxpayers to protect their rights to due process during the tax audit of the Bureau of Internal Revenue (BIR), specifically when issued a Final Decision on Disputed Assessment (FDDA).

As part of its tax audit procedures, the BIR issues a Formal Letter of Demand and Final Assessment Notice (FLD/FAN), calling for the payment of the taxpayer’s deficiency taxes that have not been resolved at the Preliminary Assessment Notice (PAN) stage. Once the taxpayer files an administrative protest against the FLD/FAN, the BIR will then assess and evaluate the protest in order to come up with its decision.

The FDDA is the final decision of the Commissioner of Internal Revenue (CIR) or a duly authorized representative on the protest to the FAN. Pursuant to the law and regulations, the FDDA should state the facts, the applicable law, the rules and regulations, or the jurisprudence on which such decision is based. Otherwise, the decision shall be void for depriving the taxpayer of their right to due process. Without the facts and the law or regulations on which such a decision is based, the taxpayer cannot intelligently dispute the assessment.

Another instance that deprives taxpayers of their right to due process based on the decision of the Court is the inclusion of a new finding in the FDDA, which was not previously part of the taxes assessed in the PAN and FLD/FAN.

LEGAL CONSEQUENCE OF THE FDDA
In a 2020 Court of Tax Appeals decision (CTA EB No. 1831, Feb. 12, 2020), the CTA held that the tax deficiency assessed for the first time in the FDDA violated the taxpayer’s right to due process, as the latter was not given the chance to refute the finding within the administrative level. Hence, the assessment should be cancelled. The CTA cited Section 228 of the 1997 Tax Code, as amended, which provides that the taxpayer needs to be informed of the law and of the facts on which the assessment is made; otherwise, the assessment will be void.

The taxpayer’s right to due process requires that the taxpayer be given the opportunity to challenge the finding of the BIR. If such an opportunity is not provided, then the right to due process has been violated.

This was also how the CTA ruled in a similar case decided in 2012 (CTA Case No. 7793).

In the 2012 case, the new assessment raised in the FDDA involves final withholding tax (FWT) on software maintenance service fees paid to a nonresident foreign corporation. In the FAN, the BIR assessed expanded withholding tax (EWT) on these fees. The taxpayer, however, argued in a protest to the FAN, that the assessment lacks legal basis, considering that the fees were paid to a United States resident not engaged in trade or business with no permanent establishment (PE) in the Philippines. Thus, the fees cannot be subjected to EWT. In response to the taxpayer’s protest, the BIR issued an FDDA. In lieu of the assessment for EWT, the BIR assessed FWT at 32% of the software maintenance fees.

In the 2020 case, the new finding involves income tax on realized foreign exchange gain, which was never raised in the PAN or FAN.

In other assessment cases, the finding can change from failure to withhold tax on compensation in the FAN to deficiency fringe benefits tax in the FDDA. The basis of the assessment is changed after the taxpayer raises in the protest that the amounts are additional benefits paid to the employees, and not salaries that are not subject to tax on compensation.

The Court decisions, nevertheless, are consistent that only the portion of the new finding is cancelled, and not the other taxes assessed in the FDDA. In short, the inclusion of a new finding does not invalidate the whole FDDA; the other findings can still be valid.

REMEDIES OF THE TAXPAYER
While the inclusion of a new finding in the FDDA has been ruled by the Court as invalid, the taxpayer still has to protest or appeal the case in a proper venue that can rule that the assessment was invalid.

If faced with such a scenario, the taxpayer can either (1) file an appeal with the CTA within 30 days from the date of receipt of the FDDA; (2) elevate their protest through a request for reconsideration to the CIR within 30 days from receipt of the said FDDA; or (3) apply for a compromise in accordance with Section 204 of the 1997 Tax Code, as amended.

In filing an appeal with the CTA and a request for reconsideration with the CIR, the taxpayer may cite the violation of due process in accordance with Section 228 of the 1997 Tax Code, as amended, as its main contention for refuting the said finding. For filing a compromise application, the taxpayer may cite as grounds the “doubtful validity” of the assessment due to the violation of due process.

This should serve as a reminder to taxpayers that they have the right to due process during the entire tax audit procedure of the BIR, up to the issuance of the FDDA. The taxpayer should raise any new finding that is included only in the FDDA in order to protect their right to due process.

However, when taxes are due, these should rightfully be paid to the government.

Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.

Ed Warren L. Balauag is a manager of Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.

As published in BusinessWorld, dated 17 March 2020