No Valid Assessment, No Criminal Liability for Willful Failure to Pay Tax under NIRC Philippines

By: Garry S. Pagaspas, CPA

Last Sept. 21, 2022, Court of Tax Appeals – First Division (CTA) Philippines issued its resolution acquitting the President of a petroleum company (Company) that was accused of criminal violation for willful failure to pay tax under Section 255, in relation to Section 253(d) and 256 of the National Internal Revenue Code, as amended (NIRC), for the reason that the Bureau of Internal Revenue (BIR) 2008 tax assessment issued to the Company was void.

Facts of the case

The Company was issued by the BIR in Philippines a Letter of Authority (LOA) for taxable year 2008 sometime May 2010, Sub Poena Duces Tecum (SDT) last February 16, 2011, Preliminary Assessment Notice (PAN) with details of discrepancies last Nov. 14, 2013, and Formal Letter of Demand (FLD) with details of discrepancies last January 9, 2013 totaling PhP23,935,637.23, exclusive of increments and penalties. The Company failed to file an administrative Protest in Philippines and BIR proceeded to collect taxes – 1^st Collection Notice dated December 10, 2013, Final Notice Before Seizure dated July 24, 2015, Warrant of Distraint and/or Levy dated September 2, 2015, and then Final Demand Before Suit dated November 15, 2015.

Despite repeated demands, the Company failed to pay taxes due in Philippines prompting BIR filed a Joint Complaint Affidavit (JCA) against the President with the Department of justice (DOJ) for criminal violation for willful failure to pay tax under Section, 255, in relation to Section 253(d) and 256 NIRC. The case proceeded with the CTA and in its Resolution last August 3, 2020, CTA found probable cause, directed the issuance of warrant of arrest of the President and fixed the bail amount at PhP60,000.00. The President voluntarily surrendered and posted bail for his liberty while the case is pending and pleaded not guilty to the charge.

Issues of the case and related Philippine CTA ruling

I. Whether or not the President is guilty, beyond reasonable doubt, of criminal violation for willful failure to pay tax under Section, 255, in relation to Section 253(d) and 256 NIRC Philippines.

According to the CTA, to sustain a conviction for willful failure to pay taxes in Philippines punishable under Section, 255, in relation to Section 253(d) and 256 NIRC, the prosecution must prove beyond reasonable doubt the existence of the following elements:

first, a corporate taxpayer is required to pay by the NIRC, as amended, or by duly promulgated rules and regulations, to pay taxes dues; second, such corporate taxpayer failed to pay said taxes; and, third, such corporate taxpayer’s president, general manager, branch manager, treasurer, officer-in-charge, and the employees responsible for the violation, willfully failed to pay said taxes.

In the Philippine Supreme Court case of Tupaz vs. Ulep  (G.R. No. 127777, Oct. 1, 1999), it held that the offense of willful failure to pay tax may be committed:

“…after the service of notice and demand for payment of the deficiency taxes upon the taxpayer…This is so because prior to the finality of the assessment, the taxpayer has not committed any violation for nonpayment of the tax. The offense was committed only after finality of the assessment coupled with taxpayer’s willful refusal to pay the taxes within the allotted period…”

In this case, CTA ruled to acquit the President of criminal charges for willful failure to pay taxes based on its findings that the Company is not required to pay the 2008 income tax assessment for being void based on the following:

a. The BIR conducted an illegal examination on the Company for taxable 2008.

CTA have noted that the LOA issued authorized RO Vida but on FLD, it was RO Gagalac who conducted the examination, an officer not named in the LOA, therefore, the finding of tax liability against the Company for 2008 is void. As held in the case of Himlayang Pilipino Plans, Inc. vs. CIR (G.R. No. 241848, May 14, 2021) absence of such authority renders the assessment or examination a patent nullity.

b. BIR’s FLD for taxable year 2008 containing Company’s liability is not demandable against the Company.

Section 6(A) of the NIRC Philippines provides that the tax or deficiency tax so assessed shall be paid upon notice and demand from the CIR, or his duly authorized representative. In the case of CIR vs. Megabucks (CTA EB No. 1974, Feb. 12, 2020) citing Adamson vs. CA (G.R. No. 120935, May 21, 2009, assessment is described as a written notice and demand made by the BIR upon the taxpayer for the settlement of due tax liability that is there definitely set and fixed.

In this case, the FLD dated January 9, 2013 alluded the Company’s period to pay taxes for 2008 but BIR failed to present as evidence the Formal Assessment Notice (FAN) referred to in FLD, as such, the CTA ruled that the Company’s obligation to pay did not arise.

c. No valid service of FLD was made on the Company or its duly authorized representatives.

Under Sec. 3(v), Rule 131 of the Rules of Court, there is a disputable presumption that “…a letter duly directed and mailed was received in the regular course of the mail.” In Nava vs. CIR (G.R. No. L-19470, Jan. 30, 1965) it was held that for the said disputable presumption to apply, the following conditions must concur: (a) that the letter was properly addressed with postage prepaid, and (b) that it was mailed. In CIR vs. GJM (G.R. No. 202695, Feb.29, 2016) it provides that to prove the fact of mailing, “…it is essential to present receipt issued by the Bureau of Posts or the Registry return card which would have been signed by the taxpayer or its authorized representative. And if said documents could not be located, the CIR should have, at the very least, submitted to the Court a certification issued by the Bureau of Posts and any pertinent documents executed with its intervention…”.

In this case, FAN and FLD was served by BIR through registered mail and presumed to have been received under the rules but BIR failed to present proof that the mail matter contained in the registered mail was the FLD. Accordingly, CTA ruled that there was no valid service of FLD to the Company or authorized representative.

d. BIR failed to prove the actual receipt of the Company of the FLD

Under Section 228 of the NIRC, “The taxpayers shall be informed in writing of the law and the facts on which the assessment is made, otherwise, the assessment shall be void”. RR 18-2013 decrees that the taxpayer is guaranteed a period of 30 days from receipt of FAN/FLD to file a valid administrative protest thereto, lest there be violation of taxpayer’s right to due process on assessment.

In this case, the BIR claimed that BIR notices were received by Ms. Corpuz as authorized representative of the Company. However, BIR failed to present Ms. Corpuz as witness to prove her authority in behalf of the Company and actual receipt of the notices and accordingly, CTA ruled that the Company or authorized representative did not actually receive the FLD in violation of the Company’s right to due process on assessment.

Based on the above, the CTA Ruled that in fine, the first element is wanting since the Company is not required to pay the tax liability for taxable year 2008 under the void FLD. The absence thereof negates the presence of second and third elements given that the Company and accused President are justified in not paying tax liability for 2008. Therefore, accused President must be acquitted.

II. Whether or not the President is liable to pay deficiency taxes for taxable year 2008 for willful failure to pay tax under Section, 255, in relation to Section 253(d) and 256 NIRC.

Under Section 205 of the NIRC, “the civil remedies for the collection of internal revenue taxes, fees or charges, and any increment thereof resulting from deficiency shall be: …(b) by criminal action…” and that “the judgement in the criminal case shall not only impose the penalty but also order payment of the taxes subject of the criminal case as finally decided by the Commissioner”. As held by the CTA, the order to pay taxes subject of this case rests upon confluence of the following requisites:

first, the tax subject of the criminal case is delinquent; and second, there must be a valid final determination thereof by the CIR.

According to CTA, when as assessment is void and did not attain finality, the taxes assessed therein may not be considered delinquency taxes. In this case, since FLD issued against the Company is void and never attained finality, the 2008 taxes has become delinquent and accordingly, the President cannot be ordered to pay the tax arising from the alleged crime. To stress, a void assessment bears no valid fruit.

Reference: CTA Case No. O-804 dated September 21, 2022

Garry is a Certified Public Accountant (CPA) and a law degree holder in tax practice for about two (2) decades now helping out taxpayers on securing BIR Rulings, appeal of BIR Ruling denials, company registrations in Philippines, tax compliance, tax savings, tax assessments, tax refunds, and other related professional tax services. He has been helping out foreign clients determine the most appropriate legal entity to register in the Philippines based on intended operations, the eventual registration of such legal business entity and other related professional services such as securing Ph Visa, payroll, and business consultancy. He was formerly with the academe and is presently a frequent speaker of Tax and Accounting Center, Inc. and other seminar entities.

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