Tax Articles

BIR’s Power to Order Closure of Business

By Atty Rodel C. Unciano

Indeed, the Bureau of Internal Revenue (BIR) is so powerful that it can even suspend business operations and close down business establishments of non-compliant taxpayers.

Section 115 of the Tax Code does authorize the Commissioner of Internal Revenue (CIR) or his authorized representative to suspend business operations and close a business establishment of any person for failure to issue receipts or invoices, failure to file value-added tax return, understatement of taxable sales or receipts, and failure to register as required under Section 236 of the Tax Code.

As provided under Revenue Memorandum Order (RMO) 3-2009, these are the only grounds for suspension or temporary closure of business. Other infractions therefore not falling under any of the above-mentioned circumstances would not be a sufficient ground for the suspension or temporary closure of a business.

And similar with the other powers of the CIR under the Tax Code, the law requires the observance of due process in the CIR’s power to close business operations of a non-compliant taxpayer. Consistent with the due process requirement of the Constitution, the taxpayer should always be given its opportunity to explain his side of the case.

Under RMO 3-2009, a non-compliant taxpayer is defined as a taxpayer, who, as a result of surveillance/stocktaking activities, has been found to have committed the above violations, and who, notwithstanding the issuance of several notices of violations, continues to refuse to comply with the requirements provided under existing rules and regulations.

If there is a sufficient ground for the closure of the establishment, a recommendation shall be made to effect such closure. Upon the approval of the recommendation to effect the closure, the BIR shall issue to the taxpayer concerned a notice requiring him to explain under oath within forty-eight (48) hours why he should not be dealt with administratively, by suspension of business or temporary closure of his business establishment, and /or criminally, for violation of pertinent provisions of the Tax Code.

Upon the taxpayer’s submission of the explanation or failure to submit its explanation on or before the deadline, the BIR shall decide whether or not to terminate the case or to pursue administrative/criminal action against the taxpayer. If the BIR deems it necessary to pursue administrative or criminal action, it shall then cause the preparation of a 5-day VAT Compliance Notice (VCN). The taxpayer may refute the findings of the BIR and submit his response thereto within two (2) days from receipt of the VCN.

If the taxpayer refuses, neglects or fails to submit a response within the prescribed period; or submitted a response that is insufficient; or refuses, neglects or fails to comply with the terms of the 5-day VCN, a Closure Order shall then be prepared. The temporary closure of the establishment shall be for the duration of not less than five (5) days and shall be lifted only upon compliance with the requirements prescribed by the Commissioner in the closure order.

Although the Tax Code empowers the BIR to order closure of non-compliant business, its enforcement should be exercised with the highest degree of restraint as the impact of closure of business is far reaching. It should be exercised with extreme caution and under the full observance of due process of law as it will not only affect the business operations of the taxpayer under investigation but also the lives of so many people whose livelihood and business activities depend upon its operations.

Rather than killing the source of its collection, it would probably be wiser for the tax authority to proceed with the audit, cause the assessment of the taxpayer’s internal revenue tax liabilities, and collect the same, if warranted.