Compromise of BIR Tax Liability in the Philippines

By: Tax and Accounting Center Philippines

If you are issued a deficiency tax assessment by the BIR, you do not lose hope for their could still be some remedies. Under Section 204 of the Tax Code, the Commissioner of Internal Revenue (CIR) is authorized to compromise taxes in the Philippines or to allow payment of taxes at minimal amounts in certain instances. Revenue Regulations No. 30-2002 dated December 16, 2002 (RR 30-2002) has been issued to supersede the provisions of Revenue Regulations Nos. 6-20001 and 7-2001. RR 30-2002 has been further amended by the following:

• Revenue Regulations No. 8-2004 dated May 19, 2004, and
• Revenue Regulations 9-2013 dated May 10, 2013.

Instances of compromise

RR No. 30-2002, as amended, provided for specific instances where tax liability in the Philippines could be compromised based on certain conditions and requirements, to wit:

1. Delinquent accounts;
2. Cases under administrative protest after issuance of the Final Assessment Notice to the taxpayer  which are still pending in the Regional Offices, Revenue District Offices, Legal Service, Large Taxpayer Service (LTS), Collection Service, Enforcement Service and other offices in the National Office;
3. Civil tax cases being disputed before the courts;
4. Collection cases filed in courts;
5. Criminal violations, other than those already filed in court or those involving criminal tax fraud.

Further, the following instances could not be compromised under RR No. 30-2002, to wit:

1. Withholding tax cases, unless the applicant-taxpayer invokes provisions of law that cast doubt on the taxpayer’s obligation to withhold;
2.  confirmed as such by the Commissioner of Internal Revenue or his duly authorized representative;
3. Criminal violations already filed in court;
4. Delinquent accounts with duly approved schedule of installment payments;
5. Cases where final reports of re-investigation or reconsideration have been issued resulting to reduction in the original assessment and the taxpayer is agreeable to such decision by signing the required agreement form for the purpose. On the other hand, other protested cases shall be handled by the Regional Evaluation Board (REB) or the National Evaluation Board (NEB) on a case to case basis;
6. Cases which become final and executory after final judgment of a court, where compromise is requested on the ground of doubtful validity of the assessment; and
7. Estate tax cases where compromise is requested on the ground of financial incapacity of the taxpayer.

Basis of compromise of tax liability in Philippines

For the above instances where RR 30-2002 allows a compromise of tax liabilities in the Philippines, if further provides the basis upon which the same could compromise as follows:

1. Compromise based on doubtful validity of delinquent or disputed assessment

Doubtful validity or when reasonable doubt as to the validity of the assessment against the taxpayer exists requiring a compromise payment of at least 40% of basic tax assessed may be allowed under the following:.

• The delinquent account or disputed assessment is one resulting from a jeopardy assessment (“jeopardy assessment” shall refer to a tax assessment which was assessed without the benefit of complete or partial audit by an authorized revenue officer, who has reason to believe that the assessment and collection of a deficiency tax will be jeopardized by delay because of the taxpayer’s failure to comply with the audit and investigation requirements to present his books of accounts and/or pertinent records, or to substantiate all or any of the deductions, exemptions, or credits claimed in his return); or
•  The assessment seems to be arbitrary in nature, appearing to be based on presumptions and there is reason to believe that it is lacking in legal and/or factual basis; or
• The taxpayer failed to file an administrative protest on account of the alleged failure to receive notice of assessment and there is reason to believe that the assessment is lacking in legal and/or factual basis; or
• The taxpayer failed to file a request for reinvestigation/ reconsideration within 30 days from receipt of final assessment notice and there is reason to believe that the assessment is lacking in legal and/or factual basis; or
• The taxpayer failed to elevate to the Court of Tax Appeals (CTA) an adverse decision of the Commissioner, or his authorized representative, in some cases, within 30 days from receipt thereof and there is reason to believe that the assessment is lacking in legal and/or factual basis; or
• Assessments made based on the “Best Evidence Obtainable Rule” and there is reason to believe that the same can be disputed by sufficient and competent evidence;
• The assessment was issued within the prescriptive period for assessment as extended by the taxpayer’s execution of Waiver of the Statute of Limitations the validity or authenticity of which is being questioned or at issue and there is strong reason to believe and evidence to prove that it is not authentic ; or
• The assessment is based on an issue where the court of competent jurisdiction made an adverse decision against the Bureau, but which the Supreme Court has not decided upon finality.

 2. Compromise based on financial incapacity

Financial incapacity or when the financial position of the taxpayer demonstrates a clear inability to pay the assessed tax requiring a compromise payment of at least 10% of basic tax assessed.

• The corporation ceased operation or is already dissolved or
• The taxpayer, as reflected in its latest Balance Sheet supposed to be filed with the Bureau of Internal Revenue, is suffering from surplus or earnings deficit resulting to impairment in the original capital by at least 50%; or
• The taxpayer is suffering from a net worth deficit (total liabilities exceed total assets) computed by deducting total liabilities (net of deferred credits and amounts payable to stockholders/owners reflected as liabilities, except business related transactions) from total assets (net of prepaid expenses, deferred charges, pre-operating expenses, as well as appraisal increases in fixed assets), taken from the latest audited financial statements; or
• The taxpayer is a compensation income earner with no other source of income and the family’s gross monthly compensation income does not exceed the levels of compensation income, and it appears that the taxpayer possesses no other leviable or distrainable assets, other than his family home; or
• The taxpayer has been declared by any competent tribunal/authority/body/government agency as bankrupt or insolvent.

No offer of compromise shall be entertained unless and until the taxpayer waives in writing his privilege of the secrecy of bank deposits under Republic Act No. 1405 or under other general or special laws, and such waiver shall constitute as the authority of the Commissioner to inquire into the bank deposits of the taxpayer. 

BIR approval on compromise of tax liabilities

Compromise of tax liabilities is discretionary upon the BIR and approval is based on existing facts and circumstances. A formal application is necessary and the BIR would require supporting documentation it would deem necessary to establish the basis of the compromise – doubtful validity or financial incapacity.

Under Section 204 of the Tax Code, as amended, where the basic tax involved exceeds One million pesos (P1,000,000) or where the settlement offered is less than the prescribed minimum rates – 40% on doubtful validity and 10% for financial incapacity, the compromise shall be subject to the approval of the Evaluation Board which shall be composed of the Commissioner and the four (4) Deputy Commissioners.

Mandatory payment on compromise application

Finally, under Revenue Regulations No. 9-2013 dated May 10, 2013 an application for compromise mandates payment of the minimum amount as a pre-requisite of compromise settlement. This is a new regulation and prior to this rule, payment was required during or upon approval of the application. In case your application is disapproved, the amount paid shall be deducted from your tax liability.

References:

• Revenue Regulations No. 9-2013 – Payment of compromise amount before application
• Revenue Regulations No. 8-2004 – Tax cases with no finality of SC decision not subject to compromise
• Revenue Regulations No. 30-2002 – General rules on compromise

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances.