Tax Assessment by Third Party Letter Notice in Philippines

By: Tax and Accounting Center Philippines

In the Philippines, tax examiners could conduct examination without necessarily and directly dealing with the records of the taxpayers.  The tax examination could be made through the tax returns, reports, and submissions of other taxpayers whom the subject taxpayers had transacted with. This manner of tax examination in the Philippines seems to be a new area the tax authorities are resorting to lately. This normally covers allegations for deficiency income tax liabilities, value added tax or percentage tax liabilities. Revenue Memorandum Order No. 13-2012 dated 29 March 2012 (RMC 13-2012) has been issued to simplify guidelines, procedures and minimize processing time in handling Letter Notices (LNs) generated through the following third-party information (TPI) data matching programs:

• Reconciliation of Listing for Enforcement System – Summary List of Sales and Purchases (TRS – RELIEF) under RMO No. 30-2003;
•  Bureau of Customs Data Program (TRS-BOC) under RMO 34-2004; and
• Tax Reconciliation System (TRS-LN) under RMO 28-2007, as further amended by RMO No. 7-2010

Here are the few material things that taxpayers must note and consider in dealing with third-party letter notices in the Philippines:

Letter Notice (LN) is considered notice of audit or investigation

RMC No. 40-2003 provides that LN issued to taxpayers can be considered a notice of audit or investigation insofar as amendment of any return covering the period referred to in the LN. Accordingly, a taxpayer shall be disqualified from amending filed tax returns covering the period referred to in the LN. This has been confirmed in the Court of Tax Appeals in the case of Big AA Corporation v. Commissioner of Internal Revenue, C.T.A. Case No. 7093, February 22, 2006, which upheld the provisions of RMC No. 40-2003 relative to the treatment of LN, as a “notice of audit or investigation” in the absence of evident error or clear abuse of discretion.”

Letter Notice covers income and business taxes

Letter notice in the Philippines is not an assessment for all internal revenue taxes. This will only deal with income tax for the taxable year covered by the letter notice, and business tax – either value added tax (VAT) or percentage tax depending upon the registration of the taxpayer.

Letter Notice and electronic Letter of Authority (eLOA) in Philippines

Letter notice is inferior to letter of authority (LOA) but may stand by its own. If there is an on-going tax audit or investigation under  an electronic Letter of Authority (eLA) prior to LN assignment, the Revenue Officer (RO) handling the eLA shall also be assigned the LN. The said LN shall not be considered closed but shall be consolidated with the eLA. The thirp party information (TPI) reflected in the LN shall be properly utilized and the extent of utilization shall be included in the report of investigation by the RO. The policy of non-closure of the eLA without the resolution of the LN shall be strictly enforced. If an eLA is terminated before an LN is issued, the investigating office shall request the tax docket of the letter notice and shall ascertain whether the discrepancies reflected in the LN are in the report of investigation. If discrepancies are not included, the RO shall pursue action on the LN based on the procedures as prescribed herein. If the discrepancies are considered, the RO shall recommend cancellation of the LN.

Computation of deficiency income, value-added and/or percentage taxes

The computation of deficiency income tax, and value added tax or percentage tax is premised in either under-declaration or un-reporting, or unaccounted source based on the simple comparison of third party sourced information (e.g. Bureau of Customs on importation, summary list of sales of suppliers, summary list of purchases of customers, etc.). The amount of discrepancy is normally computed as follows:

• Discrepancy divided by cost of sales ration and multiplied by gross profit rate to get taxable income;
• MCIT computations based on discrepancy; and,
• Discrepancy multiplied by 12% VAT rate or 3% percentage tax rate.

The above computation would tend to result to higher deficiency tax and could be a bit challenging to protest or defend. Refer to Annex “C” to “C.4” of RR No. 13-2012 for easy reference.

Payment of tax liabilities under LN

If the taxpayer is amenable to the LN computations, it may simply pay the same using BIR Form No. 0611-A. The settlement and payment of the deficiency tax(es) under an LN or issue-based eLA shall not preclude the Bureau from issuing an eLA covering the comprehensive audit of a taxpayer’s tax liabilities, if warranted. However, any payment of deficiency tax(es) shall be credited against any assessment that may be made by the investigating office pursuant to an eLA provided the discrepancies disclosed by said audit are of the same nature as the discrepancies reflected in the LN Taxpayers who shall pay within 30 days from receipt of LN are entitled to abatement of surcharge, interest and compromise penalty, otherwise, it shall be assessed with the corresponding surcharge (if applicable), interest and compromise penalty. In both cases, an “Agreement Form” (Annex ”E”) shall be executed by the taxpayer indicating therein the amount and date when the deficiency tax(es) shall be paid. Installment payment shall be allowed as settlement of the tax deficiencies arising from LN in case the total tax liabilities exceed five hundred thousand pesos (P500,000.00) for non-large taxpayers or ten million pesos (P10M) for large taxpayers. In this case, a written request for installment payment of the basic tax due plus increments using the Application for Installment Payment. In case of default of any installment payment, the remaining balance of basic tax plus the increments shall become due and demandable immediately without prior notice to taxpayer.

Effect of failure to pay LN

The taxpayer who fails to settle tax liabilities resulting from LN discrepancy shall be issued any or a combination of the following actions:

1. Issuance of eLA under certain situations and/or Preliminary Assessment Notice (PAN)/Final Assessment Notice (FAN) in accordance with the provisions of Revenue Regulations (RR) No. 12-99;
2. Imposition of administrative sanction of suspension and temporary closure of business establishment in accordance with the provisions of RMO No. 3-2009 (Oplan Kandado) if the under-declaration is thirty percent (30%) or more may be recommended;
3. Issuance and enforcement of the Subpoena Duces Tecum (SDT) in strict compliance with procedures enunciated in RMO No. 88-2010 and other applicable pertinent revenue issuances. After compliance with procedures on the issuance and enforcement of the SDT, docket shall be endorsed to the Office of the Regional Director (ORD)/Office of Assistant Commissioner – LTS (OACIR-LTS) through the AD/concerned OHREA-LTS for issuance of PAN/FAN in accordance with the provisions of Revenue Memorandum Circular (RMC) No. 23-2000.

Summary

Tax authority is now taking each angle to impose strict tax compliance and collect more taxes. They are now capitalizing on the use of taxpayer reports, returns, and other submissions in determining whether one has completely reported his purchases and sales. Discrepancy in the LN is not conclusive of a tax liability. Taxpayer is given the benefit of the doubt and is given all the opportunity to present its side of the case. Tax professionals are normally called in to assess the taxpayer in determining whether or not the alleged discrepancy represents tax liability to avoid ending up paying for a non-tax liability. Moving forward, we suggest that reports are complete and reconciled with each other and hire knowledgeable employees or professionals for the purpose.

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. For comments, you may please send mail at 

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