BY LORENZO MIGUEL A. SORIANO
THE POWER to tax is an incidental power of the state which is unlimited in scope. It is an incidental power of the state as it emanates from the necessity to defray the necessary expenses of the government to fulfill its duties and responsibilities and promote the general welfare and well-being of its constituents. As it covers the rights of the people and could take away a portion of their property, if not all, it has been described that “the power to tax involves the power to destroy.”
Being unlimited in its range, it may be subject to abuse. Hence, legislators imposed safeguards so that the rights of the people are not violated in the exercise of the power of taxation. After all, Holmes’ dictum tells us that, “the power to tax is not the power to destroy while this court sits”.
The Bureau of Internal Revenue (BIR) has been charged by legislation to assess and collect all national internal revenue taxes, fees, and charges. Tax assessments are a means by the government to collect from the people. This pertains to the power of the BIR to examine the books and records of the taxpayer and conduct an audit to determine and review its compliance with the tax rules and regulations. Thereafter, the collection of deficiency taxes may arise from such an audit.
Having such power, the taxpayers could be placed at the mercy of the BIR as to the coverage and period of tax assessments with its unbridled power to assess and collect. Now, one may ask, “Is there a limit to the BIR’s power to conduct the assessment and collect taxes?” With this in mind, existing statutes put a limit to prevent the abuse of such power by the BIR.
Generally, Section 203 of the National Internal Revenue Code (Tax Code), as amended, provides that internal revenue taxes shall be assessed within three (3) years after the last day prescribed by the law for the filing of the return, or the date when the return is filed if it was filed beyond the period prescribed by the law, whichever is later. This provision of the Tax Code explicitly provides for the period the BIR is allowed to assess the books and records of a taxpayer. However, this provision is not absolute. The Tax Code also recognizes erring taxpayers who violate the rules laid down in the Tax Code for their self-benefit.
In this instance, the statute relaxes the limitation to such power of the BIR. Thus, exemptions from this provision are those instances wherein a false or fraudulent return was filed with the intent to evade tax or of failure to file tax returns. In such cases, the BIR may assess the taxpayer at any time within ten (10) years after the discovery of fraud, falsity, or omission, pursuant to Section 222 of the Tax Code, as amended.
Stated otherwise, it is not automatic for the BIR to assess within ten (10) years, it must provide factual and legal bases of fraud, falsity, or omission to which the taxpayer should be duly informed.
In a Court of Tax Appeals (CTA) En Banc Case dated 22 June 2023, the CTA ruled that in order for the Commissioner of Internal Revenue (CIR) to avail of the 10-year period of assessment, the CIR should show that the facts upon which the fraud is based is communicated to the taxpayer and the assessment notice must contain a categorical statement that the 10-year period will be applied to the assessment.
In the case at bar, The CTA found that there is nothing in the Final Assessment Notice/Formal Letter of Demand (FAN/FLD) that expresses the CIR’s intention to apply the 10-year period of assessment. The FAN/FLD merely states that a fifty percent (50%) surcharge was imposed for filing a fraudulent return since the taxpayer failed to declare Sales/Receipts in an amount exceeding thirty percent (30%) of that declared per return pursuant to Section 248(B) of the Tax Code.
Hence, the CTA held that the absence of a clear statement for the intention of the BIR to rely on the 10-year prescription will not permit the BIR to avail itself of such a longer prescription period since it is a violation of the due process of the taxpayer’s rights. The failure of the BIR to be clear on which facts and laws it relied upon is a ground for nullifying assessment cases. Above anything, violation of due process is against the law.
While it is true that taxation has the power to destroy and is infinite in its range, it is also a hornbook rule that it should not be exercised in violation of the taxpayers’ constitutional rights. At the end of the day, the purpose of taxation is for the general welfare and well-being of the people. If it stomps on people’s rights, it is akin to killing the hen that lays the golden egg, thereby defeating its purpose.
Above all, taxpayers should be well aware of the rights afforded under the Constitution and statutes. For after all, being an informed citizen is key to a better implementation of our tax rules and regulations.
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Lorenzo Miguel A. Soriano is a manager in the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd. For comments and inquiries, please email pagrantthornton@ph.gt.com.
