Tax Articles

Tax Compromise

By Atty. Irwin C. Nidea, Jr.

It is a welcome development that the Commissioner of Internal Revenue is open to exercise his power to agree on a compromise on cases that are pending with the Court of Tax Appeals (CTA) and the Supreme Court (SC). Through its own initiative, the CTA has also ordered all litigants to explore, through mediation, the possibility of compromise.

The rules of the BIR mandates that when a taxpayer intends to apply for compromise, he must pay first. Generally, the minimum compromise amount that must be paid is either 40% of the basic tax due if the taxpayer’s ground is doubtful validity of the tax assessment and 10% of the basic tax due if the taxpayer is financially incapable. What happens to the taxpayer’s payment when the compromise does not push through or is disapproved by the Commissioner? The rules of the BIR states that it will not be returned. There will be no refund. It will only be applied to the taxpayer’s liability if the case is decided against it. This rule is an impediment to any taxpayer who intends to avail of the opportunity to settle its tax court cases.

In other words, the BIR will only give a glance to a compromise application when the taxpayer has already deposited the proposed compromise amount. But if the BIR does not agree to compromise, it will hold on to the money and just offset it to the taxpayer’s liability, as may be found by the court. But what if the court finds that the taxpayer is not liable after all? What happens to the compromise amount paid? Should the taxpayer now file a claim for refund with the court? It seems to be the case.

Just recently, the SC has ruled that when a taxpayer’s application for abatement is denied, he can directly file the claim for refund in court without filing an administrative claim first. According to the SC, the filing of an administrative claim would be an exercise in futility because the same office where the said administrative claim will be filed is the very same office which denied the taxpayer’s application for abatement. What is clear in this case is that a refund claim must be filed when an application for abatement is denied. Like an application for compromise, the taxpayer must also pay upfront before its application for abatement is processed. But in an application for abatement, the gamble is higher - the upfront payment is 100% of the basic tax.

There may be a way for a taxpayer to protect itself from this one-sided BIR rule. If the taxpayer initiates the application for compromise not directly to the BIR but through the CTA’s mediation proceedings, then the amount of compromise payment must be protected. It must be returned without the need for the taxpayer to file a claim for refund There is no clear precedent as of now.

Hopefully, the court will make a distinction between an administrative offer of compromise and a judicial offer of compromise. If the compromise is through a mediation proceeding, which is a court proceeding, the upfront compromise payment must be returned by the BIR if the compromise negotiation is not successful. It is also better if the court will clarify in its rules that while a compromise negotiation is ongoing, the taxpayer is not mandated to pay upfront. This is to avoid scenarios where the taxpayer is put in a disadvantage.

Many more will be attracted to apply for compromise if upfront payment is not a condition for the BIR to entertain the same. Any taxpayer will hesitate to avail of this program because he has to gamble his hard-earned money and there is no guarantee that his misery will end.