Tax Articles

The Standard of Reasonableness

By: Atty. Jomel N. Manaig

It is right and proper to ask for what is due. However, asking for too much often leads to no good thing. But how do you know when something is too much? Where do you draw the line between what is acceptable and what is not?

A standard that we could use to determine what should be enough is “reasonableness.” Is asking for a particular thing considered as reasonable? If it is not reasonable, it should not be asked much less be required.

This standard is applicable mainly to general aspects of life. But can we focus its application on a particular facet: say, tax? I say it is worth to have a considerable look at how reasonableness is applied in tax, whether it be in relation to assessments, refund, or compliance.

In the case of Philippine Airlines v. Commissioner of Internal Revenue (G.R. No. 206079-80), the Supreme Court had the opportunity to apply the standard of reasonableness on a requirement being imposed by the BIR when it comes to refund of tax withheld. Under its franchise agreement, PAL is exempt from tax on interest income earned from bank deposits, among others, and that any excess payment over taxes due from PAL shall either be refunded or credited against its tax liability for the succeeding taxable year.

The BIR, not keen on granting the refund, insisted that PAL failed to prove that the taxes withheld from its interest income were actually remitted. The Supreme Court, however, held that remittance need not be proven. PAL needs only to prove that taxes were withheld from its interest income.

Aside from the evident lack of responsibility on the part of PAL for the actual remittance to the BIR of the tax withheld, the Supreme Court also faulted the BIR from failing to appreciate the unreasonable difficulty that it would have put PAL in claiming the statutory exemption granted to it. In requiring that it prove actual remittance, the BIR effectively put the burden on PAL to prove that both the government and the banks complied with their legal obligation. It would have been near impossible for the taxpayer to demand to see the records of the payor bank or the ledgers of the government.

In other words, the BIR required something of PAL that the latter could not provide, not because of a lack of willingness to provide the information but by its near impossibility to do so. Indeed, this is an unreasonable requirement to unjustly defeat PAL’s statutorily granted tax exemption.

This kind of unreasonable requirement by the BIR is not limited to refund of taxes withheld. Other requirements of this nature exist in other aspects of tax.

In applications for refund of taxes, requiring documents not provided for or enumerated under pertinent revenue regulations and issuances as a condition prior to receiving the application is an unreasonable requirement. Taxpayer-claimants are guided by what is provided by revenue regulations and issuances. It is unreasonable to refuse their applications based on an undocumented requirement or a condition brought about by mere whim of a revenue official.

In claiming the benefits of VAT zero-rating for suppliers of registered export enterprises, requiring suppliers to prove that the purchases made by the registered export enterprises are used directly and exclusively in the registered project (aside from the sworn affidavit) is not a reasonable requirement. Suppliers do not have access to the accounting, production, and financial records of the registered export enterprises. Forcing the former to produce information that is held only by the latter to enjoy VAT zero-rating incentive is an unreasonable requirement.

In tax compliance, taxpayers are at times hit with sudden bouts of open cases for alleged unfiled tax returns or other reportorial requirements dating back to more than a decade. They are then asked to produce these documents under pain of stiff fines. It should be noted that taxpayers are only required to retain or preserve their records for ten (10) years reckoned from the filing of the related return or its deadline, whichever is later. The first five (5) years would require taxpayers to retain the hard copies while the only electronic copies are required thereafter. Demanding taxpayers to produce documents far beyond the mandatory preservation period is therefore unreasonable.

These are just some aspects of tax which the prudent exercise of the standard of reasonableness would do wonders. We do not need a separate Supreme Court case tackling these specific problems in particular before we can apply them. The standard of reasonableness should be universal in application.

Reasonableness should not be in such short supply that we lose sight of what is clear before us. It should not be shunned so as to defeat what taxpayers are duly entitled to. It should not be disregarded so as to ask for more than what is due.