Tax Articles

Tax Compromise Rights and Remedies

By Atty. Irwin C. Nidea Jr.

The government obviously needs money to sustain its efforts in giving aid to many suffering Filipinos during this tumultuous year of volcanic eruption, pandemic and super typhoon. Aside from borrowing money, the government must look for other sources of revenue. It is hesitant to introduce new taxes in fear of being accused as insensitive to businesses that are barely surviving. But the government needs to look for money fast. What are the other possible sources of revenue?

Low lying fruits for tax collection are tax investigations that are already in their final stages. That is why I am not surprised that the BIR is active in issuing Final Decisions on Disputed Assessment, Warrants of Distraint and Levy and Notice of Garnishment across all sectors. When a taxpayer receives a collection notice, it has no other recourse but to either pay or go to court.

To avoid this, tax investigations that are still in their early stages are encouraged by the BIR to apply for compromise. One ground for compromise is doubtful validity of assessment, in which case, the Commissioner can compromise to not less than 40 percent of the basic tax. Another ground is when the taxpayer is financially incapable, in which case, taxpayer may only pay not less than 10 percent of the basic tax. The Tax Code allows compromise amount lower than-the-above rates but it has to be approved by the National Evaluation Board, which is composed of the four deputy commissioners and the Commissioner.

But in order to avail of compromise, taxpayers must comply with the following: 1. Agree to pay the amount offered (generally 10% of the basic tax or 40% of the basic tax) and 2. Submit the following documents as required under Revenue Regulation (RR) No. 30-2002: a. Latest Audited Financial Statements; b. Waiver of the Privilege of the Secrecy of Bank Deposits under Republic Act (RA) No. 1405; and c. Sworn Statement of no Tax Credit Certificate(TCC) on hand or in transit or claim for tax refund or TCC.

Compromise must be consensual. The taxpayer and the Commissioner must sign an agreement before a compromise becomes effective. But as mentioned above, a taxpayer is required to pay the amount it offers. For example, if the basic tax being assessed is P100 Million, the taxpayer has to pay P10 Million in case of financial incapacity or P40 Million in case of doubtful validity before the BIR is even allowed to start processing the application for compromise. What if after paying, the Commissioner does not approve of the compromise, what happens with the taxpayer’s advance payment?

Unfortunately, the BIR’s stand on this issue is that it will keep the money and it will apply the same to the taxpayer’s tax liabilities. What is the taxpayer’s recourse when this happens? The taxpayer can either accept the BIR’s stand and let the BIR keep the money or it may apply for a tax refund, which everybody knows is a very tedious process. In other words, a taxpayer can only recover an advance payment of a denied compromise application by filing an administrative claim for refund with the BIR and a case in court if necessary.

Can the Court of Tax Appeals take jurisdiction of a denied compromise? The CTA in a recent decision, ruled that if the BIR denies an application for compromise, it can entertain an appeal on the same. Since a compromise agreement cannot be forced upon the taxpayer and the Commissioner, what can be ruled upon by the CTA in an appeal of a denied application for compromise? The CTA in the same case, cancelled the entire assessment because the BIR failed to collect the assessment within the prescribed period. The compromise process took more than 20 years before a final decision of denial was issued by the Commissioner. According to the court, the BIR has only 3 years (now 5 years) to enforce collection.

A taxpayer must consider applying for a compromise but he must also be aware of the risks involved. There is a possibility that the Commissioner will deny an application for compromise and keep whatever the taxpayer has paid in advance. When this happens, a taxpayer may be forced to go to court to recover his advance payment.

A taxpayer must also be aware of his rights. An application for compromise, for example, can still be appealed to the CTA. It may be used as a path to have the entire tax assessment cancelled.

Compromise is a good source of revenue for the government. It will spare the taxpayer and the government from engaging in a contentious and time-consuming litigation. But in order for this program to be successful, the BIR must reconsider its policy of requiring taxpayers to pay in advance.