DIGESTS
Powers of the CIR & Sec. of Finance
Authority to examine books, etc.
With respect to the BIR, its Commissioner is authorized to examine books, paper, record, or other data of taxpayers but only to ascertain the correctness of any return, or in making a return when none was made, or in determining the liability of any person for any internal revenue tax, or in collecting such liability, or evaluation the person’s tax compliance. Since there are no taxes involved in this case, the BIR has no power and authority to open and examine the books of accounts of the Big 3 (oil companies).
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Power to abate or cancel tax liability
The authority of the CIR to abate or cancel a tax liability is enshrined in Section 204(B) of the 1997 NIRC.
On September 27, 2001, the BIR issued RR No. 13-2001 prescribing the guidelines on the implementation of Section 204(B) regarding abatement or cancellation of internal revenue tax liabilities.
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Power to abate or cancel tax liability; Proper interpretation of what constitutes “circumstances beyond control”
In the present case, the Court finds no abuse of authority on the part of the CTA. Verily, the findings of the CTA, supported as they are by logic and law, carry great weight in the proper interpretation of what constitutes as “circumstances beyond control.” Undeniably, a technical malfunction is not a situation too bleak so as to render petitioner completely without recourse. As correctly observed by the CTA, petitioner would not incur delay in the filing of its ITR if only it filed the same before the deadline and not at the 11th hour or on the last day of filing. On petitioner’s averment that it had difficulty in interpreting the correct Gross Philippine Billings Computation for income tax under the then newly-issued RR No. 11-2001, the CTA aptly stated that:
To avoid delay, petitioner could file a tentative quarterly income return if it was still unsure with the figures contained therein to avoid paying the [25%] surcharge for late filing. Thereafter, it could modify, change, or amend the tentative return already filed if warranted, pursuant to Section 6(A) of the 1997 NIRC.
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Abatement, not compromise
Although referred to in the pleadings as a compromise, the matter at hand is actually an abatement or a cancellation. Abatement is the “diminution or decrease in the amount of tax imposed;” it refers to “the act of eliminating or nullifying; x x x of lessening or moderating xxx.” To abate is “to nullify or reduce in value or amount”; while to cancel is “to obliterate, cross out, or invalidate”; and “to strike out; xxx delete; xxx erase; xxx make void or invalid; xxx annul; xxx destroy; xxx revoke or recall.”
The BIR may therefore abate or cancel the whole or any unpaid portion of a tax liability, inclusive of increments, if its assessment is excessive or erroneous; or if the administration costs involved do not justify the collection of the amount due. No mutual concessions need be made, because an excessive or erroneous tax is not compromised; it is abated or canceled. Only correct taxes should be paid. Besides, as we have discussed earlier, there was no finality in the assessment that could be settled.
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Power to compromise.
In the instances in which the Collector of Internal Revenue is vested with authority to compromise, such authority should be exercised in accordance with the collector’s discretion, and courts have no power, as a general rule, to compel him to exercise such discretion one way or another.
~~~Koppel (Phils.), Inc. vs. The Collector of Internal Revenue (G.R. No. L-1977, 21 September 1950, En Banc, CJ. Moran)
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What does compromise imply?
As this Court has had occasions to explain, a compromise implies agreement. One party cannot impose it upon the other. If an offer of compromise is rejected by the taxpayer, as in this case, the Commissioner of Internal Revenue should file a criminal action if he believes that the taxpayer is criminally liable for violation of the tax law as the only way to enforce a penalty. As penalty can be imposed only on a finding of criminal liability.
~~~Commissioner of Internal Revenue vs. Abad (G.R. No. L-19627, 27 June 1968, En Banc, J. Castro)
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An invalid assessment cannot be used as a basis for the perfection of a compromise.
Under the present provisions of the Tax Code and pursuant to elementary due process, taxpayers must be informed in writing of the law and the facts upon which a tax assessment is based; otherwise, the assessment is void. Being invalid, the assessment cannot in turn be used as a basis for the perfection of a tax compromise.
It would be premature for this Court to declare that the compromise on the estate tax liability has been perfected and consummated, considering the earlier determination that the assessment against the estate was void. Nothing has been settled or finalized. Under Section 204(A) of the Tax Code, where the basic tax involved exceeds one million pesos or the settlement offered is less than the prescribed minimum rates, the compromise shall be subject to the approval of the NEB composed of the petitioner and four deputy commissioners.
Finally, as correctly held by the appellate court, this provision applies to all compromises, whether government-initiated or not. Ubi lex non distinguit, nec nos distinguere debemos. Where the law does not distinguish, we should not distinguish.
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When is a compromise penalty imposable?
It is now a well settled doctrine that compromise penalty cannot be imposed or collected without the agreement or conformity of the taxpayer.
~~~Wonder Mechanical Engineering Corp. vs. Court of Tax Appeals, et al. (G.R. Nos. L-22805 and L-27858, 30 June 1975, 1st Div., J. Esguerra)
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The CTA correctly held that the compromise penalty of P20,000.00 could not be imposed on petitioner, a compromise being, by its nature, mutual in essence. The payment made under protest by petitioner could only signify that there was no agreement that had effectively been reached between the parties.
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Power to decide matters concerning tax refunds.
Sections 204 (C) of the NIRC grants the CIR the authority to credit or refund taxes which are erroneously collected by the government.
The authority of the CIR to refund erroneously collected taxes is likewise reflected in Section 229 of the NIRC.
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It bears stressing that the power to decide matters concerning refunds of internal revenue taxes, among others, is vested in the CIR. It has the duty to ascertain the veracity of such claims and should not just wait and hope for the burden to fall on the claimant when the issue reaches the court.
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Not authorized to refund taxes as a matter of gratuity.
The Collector of Internal Revenue simply collects that which the law has said that he must collect. He is not authorized to refund taxes as a matter of gratuity.
~~~Chui vs. Posadas, Jr. (G.R. No. 23487, 11 February 1925, En Banc, J. Malcolm); Koppel (Phils.), Inc. vs. The Collector of Internal Revenue (G.R. No. L-1977, 21 September 1950, En Banc, CJ. Moran)
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The CIR’s authority to credit or refund taxes, being a specific statutory mandate, cannot be overridden by averse interpretations made through mere administrative issuances.
As above-stated, the NIRC vests upon the CIR, being the head of the BIR, the authority to credit or refund taxes which are erroneously collected by the government. This specific statutory mandate cannot be overridden by averse interpretations made through mere administrative issuances, such as RMC No. 42-99, which – as argued by the CIR – shifts to the executing agencies (particularly, NPC in this case) the power to refund the subject taxes:
(3) In cases where income taxes were previously paid directly by the Japanese contractors or nationals, the corresponding cash refund shall be recovered from the government executing agencies upon the presentation of proof of payment by the Japanese contractors or nationals. (Emphasis and underscoring supplied)
A revenue memorandum circular is an administrative ruling issued by the CIR to interpret tax laws. It is widely accepted that an interpretation by the executive officers, whose duty is to enforce the law, is entitled to great respect from the courts. However, such interpretation is not conclusive and will be disregarded if judicially found to be incorrect. Verily, courts will not tolerate administrative issuances that override, instead of remaining consistent and in harmony with, the law they seek to implement, as in this case. Thus, Item B (3) of RMC No. 42-99, an administrative issuance directing petitioner to claim the refund from NPC, cannot prevail over Sections 204 and 229 of the NIRC, which provide that claims for refund of erroneously collected taxes must be filed with the CIR.
All told, petitioner correctly filed its claim for tax refund under Sections 204 and 229 of the NIRC to recover the erroneously paid taxes amounting to P44,288,712.00 as income tax and P8,324,100.00 as BPRT from the BIR. To reiterate, petitioner’s entitlement to the refund is based on the tax assumption provision in the Exchange of Notes. Given that this is a case of tax assumption and not an exemption, the BIR is, therefore, not without recourse; it can properly collect the subject taxes from the NPC as the proper party that assumed petitioner’s tax liability.
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Authority to cancel duly issued Tax Credit Certificates (TCCs).
On the issue of the authority to cancel duly issued TCCs, we agree with respondent that the Center has concurrent authority with the BIR and BOC to cancel the TCCs it issued. The Department of Finance One Stop Shop Inter-Agency Tax Credit and Duty Drawback Center (Center) was created under AO 266 in relation to EO 226. A scrutiny of said executive issuances clearly shows that the Center was granted the authority to issue TCCs pursuant to its mandate under AO 266. Sec. 5 of AO 266 provides:
SECTION 5. Issuance of Tax Credit Certificates and/or Duty Drawback.—The Secretary of Finance shall designate his representatives who shall, upon the recommendation of the CENTER, issue tax credit certificates within thirty (30) working days from acceptance of applications for the enjoyment thereof. (Emphasis supplied.)
On the other hand, it is undisputed that the BIR under the NIRC and related statutes has the authority to both issue and cancel TCCs it has issued and even those issued by the Center, either upon full utilization in the settlement of internal revenue tax liabilities or upon conversion into a tax refund of unutilized TCCs in specific cases under the conditions provided. AO 266 however is silent on whether or not the Center has authority to cancel a TCC it itself issued. Sec. 3 of AO 266 reveals:
SECTION 3. Powers, Duties and Functions.—The Center shall have the following powers, duties and functions:
a. To promulgate the necessary rules and regulations and/or guidelines for the effective implementation of this administrative order;
x x x x
g. To enforce compliance with tax credit/duty drawback policy and procedural guidelines;
x x x x
l. To perform such other functions/duties as may be necessary or incidental in the furtherance of the purpose for which it has been established. (Emphasis supplied.)
Sec. 3, letter l. of AO 266, in relation to letters a. and g., does give ample authority to the Center to cancel the TCCs it issued. Evidently, the Center cannot carry out its mandate if it cannot cancel the TCCs it may have erroneously issued or those that were fraudulently issued. It is axiomatic that when the law and its implementing rules are silent on the matter of cancellation while granting explicit authority to issue, an inherent and incidental power resides on the issuing authority to cancel that which was issued. A caveat however is required in that while the Center has authority to do so, it must bear in mind the nature of the TCC’s immediate effectiveness and validity for which cancellation may only be exercised before a transferred TCC has been fully utilized or canceled by the BIR after due application of the available tax credit to the internal revenue tax liabilities of an innocent transferee for value, unless of course the claimant or transferee was involved in the perpetration of the fraud in the TCC’s issuance, transfer, or utilization. The utilization of the TCC will not shield a guilty party from the consequences of the fraud committed.
While we agree with respondent that the State in the performance of governmental function is not estopped by the neglect or omission of its agents, and nowhere is this truer than in the field of taxation, yet this principle cannot be applied to work injustice against an innocent party. In the case at bar, PSPC’s rights as an innocent transferee for value must be protected. Therefore, the remedy for respondent is to go after the claimant companies who allegedly perpetrated the fraud. This is now the subject of a criminal prosecution before the Sandiganbayan docketed as Criminal Case Nos. 25940-25962 for violation of RA 3019.
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Power to interpret tax laws; When the opinion or ruling of the CIR is accorded weight and even finality.
The opinions and rulings of officials of the government called upon to execute or implement administrative laws, command respect and weight.
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The opinion or ruling of the CIR, the agency tasked with the enforcement of tax laws, is accorded much weight and even finality, when there is no showing that it is patently wrong.
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Power to interpret tax laws; Revenue memorandum circulars.
A revenue memorandum circular is an administrative ruling issued by the CIR to interpret tax laws. It is widely accepted that an interpretation by the executive officers, whose duty is to enforce the law, is entitled to great respect from the courts. However, such interpretation is not conclusive and will be disregarded if judicially found to be incorrect. Verily, courts will not tolerate administrative issuances that override, instead of remaining consistent and in harmony with, the law they seek to implement, as in this case. Thus, Item B (3) of RMC No. 42-99, an administrative issuance directing petitioner to claim the refund from NPC, cannot prevail over Sections 204 and 229 of the NIRC, which provide that claims for refund of erroneously collected taxes must be filed with the CIR.
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The basic law prevails over rule or regulation.
It is settled that in case of discrepancy between the basic law and a rule or regulation issued to implement said law, the basic law prevails, because the said rule or regulation cannot go beyond the terms and provisions of the basic law.
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Power to interpret tax laws is not absolute.
Even conceding that the construction of a statute by the CIR is to be given great weight, the courts, which include the CTA, are not bound thereby if such construction is erroneous or is clearly shown to be in conflict with the governing statute or the Constitution or other laws. “It is the role of the Judiciary to refine and, when necessary, correct constitutional (and/or statutory) interpretation, in the context of the interactions of the three branches of the government.” It is furthermore the rule of long standing that this Court will not set aside lightly the conclusions reached by the CTA which, by the very nature of its functions, is dedicated exclusively to the resolution of tax problems and has, accordingly, developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority.
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Power to interpret tax laws; When there is grave abuse of discretion in the exercise of such power.
Section 4 of RA No. 8424 empowers the BIR Commissioner to interpret tax laws and to decide tax cases.
But the BIR Commissioner cannot, in the exercise of such power, issue administrative rulings or circulars inconsistent with the law to be implemented. Administrative issuances must not override, supplant, or modify the law, they must remain consistent with the law intended to carry out. Surely, courts will not countenance administrative issuances that override, instead of remaining consistent and in harmony with the law they seek to apply and implement.
As shown, the BIR Commissioner expanded or modified the law when she declared that association dues, membership fees, and other assessment/charges are subject to income tax, VAT, and withholding tax. In doing so, she committed grave abuse of discretion amounting to lack or excess of jurisdiction.
In sum, the BIR Commissioner is empowered to interpret our tax laws but not expand or alter them. In the case of RMC No. 65-2012, however, the BIR Commissioner went beyond, if not, gravely abused such authority
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Power to interpret tax laws; What are BIR Rulings?
BIR rulings are the official position of the Bureau to queries raised by taxpayers and other stakeholders relative to clarification and interpretation of tax laws. In this regard, the primary purpose of a BIR Ruling is simply to determine whether a certain transaction, under the law, is taxable or not based on the circumstances provided by the taxpayer.
What sets apart BIR Rulings from other issuances of the BIR is that it relates to a particular taxpayer’s set of facts and circumstances and a consequent determination of taxability or tax exemption, when applicable.
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Power to interpret tax laws; Nature of BIR Rulings; Requiring a prior BIR Ruling as a condition for the approval of the refund claim is clearly illogical.
BIR rulings are the official position of the Bureau to queries raised by taxpayers and other stakeholders relative to clarification and interpretation of tax laws. In this regard, the primary purpose of a BIR ruling is simply to determine whether a certain transaction, under the law, is taxable or not based on the circumstances provided by the taxpayer. As admitted by the CIR, rulings merely operate to “confirm” the existence of the conditions for exemption provided under the law. If all the requirements for exemption set forth under the law are complied with, the transaction is considered exempt, whether or not a prior BIR ruling was secured by the taxpayer.
In practice, a taxpayer often secures a BIR ruling, prior to entering into a transaction, to prepare for any tax liability. However, in case a taxpayer already paid the tax, believing to be liable therefor, and later on files a claim for refund on the basis of an exemption provided under the law, requiring a prior BIR ruling as a condition for the approval of the refund claim is clearly illogical.
Moreover, as correctly pointed out by the CTA EB, there is nothing in Section 40(C)(2) of the NIRC of 1997, as amended, which requires the taxpayer to first secure a prior confirmatory ruling before the transaction may be considered as a tax-free exchange. The BIR should not impose additional requirements not provided by law, which would negate the availment of the tax exemption. Instead of resorting of formalities and technicalities, the BIR should have made its own determination of the merits of respondents’ claim for exemption in respondents administrative application for refund. However, the Court notes that, in this case, the CIR not only failed to act on respondents administrative claim for refund, it also failed to present any evidence during trial before the CTA to prove that the subject transaction is not covered by the tax exemption
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The power to interpret tax laws is subject to direct review of the Secretary of Finance.
In the matter of tax issuances, such as BIR Rulings, the power of the CIR to interpret the provisions of the Tax Code and other tax laws is subject to the administrative remedy of a direct review of the Secretary of Finance. Failure to raise the matter to the Secretary of Finance constitutes a violation of the exhaustion doctrine.
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When the tax authorities’ interpretations will not be upheld.
In the scheme of judicial tax administration, the need for certainty and predictability in the implementation of tax laws is crucial. Our tax authorities fill in the details that Congress may not have the opportunity or competence to provide. The regulations these authorities issue are relied upon by taxpayer, who are certain that these will be followed by the courts. Courts, however, will not uphold these authorities’ interpretations when clearly absurd, erroneous or improper.
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Interpretative regulations.
An interpretative or implementing rule is defined under Section 2 (2), Chapter 1, Book VIII of the Revised Administrative Code, viz.:
Section 2. Definitions. – As used in this Book:
x x x
(2) “Rule” means any agency statement of general applicability that implements or interprets a law, fixes and describes the procedures in, or practice requirements of, an agency, including its regulations. The term includes memoranda or statements concerning the internal administration or management of an agency not affecting the rights of, or procedure available to, the public.
Chapter 2 of Book VII of the same Code further provides the manner by which administrative rules attain effectivity:
Section 3. Filing.-
(1) Every agency shall file with the University of the Philippines Law Center three (3) certified copies of every rule adopted by it. Rules in force on the date of effectivity of this Code which are not filed within three (3) months from that date shall not thereafter be the basis of any sanction against any party or persons.
(2) The records officer of the agency, or his equivalent functionary, shall carry out the requirements of this section under pain of disciplinary action.
(3) A permanent register of all rules shall be kept by the issuing agency and shall be open to public inspection.
Section 4. Effectivity. – In addition to other rule-making requirements provided by law not inconsistent with this Book, each rule shall become effective fifteen (15) days from the date of filing as above provided unless a different date is fixed by law, or specified in the rule in cases of imminent danger to public health, safety and welfare, the existence of which must be expressed in a statement accompanying the rule. The agency shall take appropriate measures to make emergency rules known to persons who may be affected by them.
SECTION 5. Publication and Recording.—The University of the Philippines Law Center shall:
(1) Publish a quarterly bulletin setting forth the text of rules filed with it during the preceding quarter; and
(2) Keep an up-to-date codification of all rules thus published and remaining in effect, together with a complete index and appropriate tables.
SECTION 6. Omission of Some Rules.— (1) The University of the Philippines Law Center may omit from the bulletin or the codification any rule if its publication would be unduly cumbersome, expensive or otherwise inexpedient, but copies of that rule shall be made available on application to the agency which adopted it, and the bulletin shall contain a notice stating the general subject matter of the omitted rule and new copies thereof may be obtained.
(2) Every rule establishing an offense or defining an act which, pursuant to law is punishable as a crime or subject to a penalty shall in all cases be published in full text.
SECTION 7. Distribution of Bulletin and Codified Rules.—The University of the Philippines Law Center shall furnish one (1) free copy each of every issue of the bulletin and of the codified rules or supplements to the Office of the President, Congress, all appellate courts and the National Library. The bulletin and the codified rules shall be made available free of charge to such public officers or agencies as the Congress may select, and to other persons at a price sufficient to cover publication and mailing or distribution costs.
SECTION 8. Judicial Notice.—The court shall take judicial notice of the certified copy of each rule duly filed or as published in the bulletin or the codified rules.
SECTION 9. Public Participation.—(1) If not otherwise required by law, an agency shall, as far as practicable, publish or circulate notices of proposed rules and afford interested parties the opportunity to submit their views prior to the adoption of any rule.
(2) In the fixing of rates, no rule or final order shall be valid unless the proposed rates shall have been published in a newspaper of general circulation at least two (2) weeks before the first hearing thereon.
(3) In case of opposition, the rules on contested cases shall be observed. (Emphasis supplied)
Excepted are interpretative regulations and those merely internal in nature, which do not require filing with the U.P. Law Center for their effectivity. On this score, ASTEC v. ERC [695 Phil. 243, 280 (2012)] is proper:
As interpretative regulations, the policy guidelines of the ERC on the treatment of discounts extended by power suppliers are also not required to be filed with the U.P. Law Center in order to be effective. Section 4, Chapter 2, Book VII of the Administrative Code of 1987 requires every rule adopted by an agency to be filed with the U.P. Law Center to be effective. However, in Board of Trustees of the Government Service Insurance System v. Velasco, this Court pronounced that “[n]ot all rules and regulations adopted by every government agency are to be filed with the UP Law Center.” Interpretative regulations and those merely internal in nature are not required to be filed with the U.P. Law Center. Paragraph 9 (a) of the Guidelines for Receiving and Publication of Rules and Regulations Filed with the U.P. Law Center states:
9. Rules and Regulations which need not be filed with the U.P. Law Center, shall, among others, include but not be limited to, the following:
a. Those which are interpretative regulations and those merely internal in nature, that is, regulating only the personnel of the Administrative agency and not the public. (Emphasis supplied)
RR 15-2013 is an internal issuance for the guidance of “all internal revenue officers and others concerned.” It is also an interpretative issuance vis-à-vis RA 10378, thus:
SECTION 2. SCOPE. — Pursuant to Section 244 of the National Internal Revenue Code of 1997 (NIRC), as amended, and Section 5 of RA No. 10378, these Regulations are hereby promulgated to implement RA No. 10378, amending Sections 28(A)(3)(a), 109, 118 and 236 of the NIRC.
RR 15-2013 merely sums up the rules by which international carriers may avail of preferential rates or exemption from income tax on their gross revenues derived from the carriage of persons and their excess baggage based on the principle of reciprocity or an applicable tax treaty or international agreement to which the Philippines is a signatory. Interpretative regulations are intended to interpret, clarify or explain existing statutory regulations under which the administrative body operates. Their purpose or objective is merely to construe the statute being administered and purport to do no more than interpret the statute. Simply, they try to say what the statute means and refer to no single person or party in particular but concern all those belonging to the same class which may be covered by the said rules.
Indeed, when an administrative rule is merely interpretative in nature, its applicability needs nothing further than its bare issuance, for it gives no real consequence more than what the law itself has already prescribed. As such, RR 15-2013 need not pass through a public hearing or consultation, get published, nay, registered with the U.P. Law Center for its effectivity.
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To be binding to all taxpayers who are similarly situated, the BIR/VAT Ruling being invoked, must be a general interpretative rule.
Neither can TPC rely on VAT Ruling No. 011-5, which considered the sales of electricity of Hedcor effectively zero-rated from the effectivity of the EPIRA despite the fact that it was issued a COC only on November 5, 2003, as this is a specific ruling, issued in response to the query made by Hedcor to the CIR. As such, it is applicable only to a particular taxpayer, which is Hedcor. Thus, it is not a general interpretative rule that can be applied to all taxpayers similarly situated.
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A rule which carries a penal sanction will bind the public if the public is officially and specifically informed.
On the issue of the publication of the Center’s Excom Resolution No. 03-05-99 providing for the “Guidelines and Procedures for the Cancellation, Recall and Recovery of Fraudulently Issued Tax Credit Certificates,” we find that the resolution is invalid and unenforceable. It authorizes the cancellation of TCCs and TDM which are found to have been granted without legal basis or based on fraudulent documents. The cancellation of the TCCs and TDM is covered by a penal provision of the assailed resolution. Such being the case, it should have been published and filed with the National Administrative Register of the U.P. Law Center in accordance with Secs. 3, 4, and 5, Chapter 2 of Book VII, EO 292 or the Administrative Code of 1987.
We explained in People v. Que Po Lay [94 Phil. 640 (1954)] that a rule which carries a penal sanction will bind the public if the public is officially and specifically informed of the contents and penalties prescribed for the breach of the rule. Since Excom Resolution No. 03-05-99 was neither registered with the U.P. Law Center nor published, it is ineffective and unenforceable. Even if the resolution need not be published, the punishment for any alleged fraudulent act in the procurement of the TCCs must not be visited on PSPC, an innocent transferee for value, which has not been shown to have participated in the fraud. Respondent must go after the perpetrators of the fraud.
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The absence of the regulation does not automatically mean that the law itself would become inoperative.
A tax regulation is promulgated by the finance secretary to implement the provisions of the Tax Code. While it is desirable for the government authority or administrative agency to have one immediately issued after a law is passed, the absence of the regulation does not automatically mean that the law itself would become inoperative.
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When an administrative rule is given a retroactive effect.
An administrative rule interpretive of a statute, and not declarative of certain rights and corresponding obligations, is given retroactive effect as of the date of the effectivity of the statute. RR 12-99 is one such rule. Being interpretive of the provisions of the Tax Code, even if it was issued only on September 6, 1999, this regulation was to retroact to January 1, 1998 — a date prior to the issuance of the preliminary assessment notice and demand letter.
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When prejudicial to the taxpayer, BIR Rulings will no be given retroactive application.
Clearly, whether the subject VAT ruling may validly be given retrospective effect is the lis mota in the case. Put in another but specific fashion, the sole issue to be addressed is whether respondent’s sale of gold to the Central Bank during the period when such was classified by BIR issuances as zero-rated could be taxed validly at a 10% rate after the consummation of the transactions involved.
In a long line of cases, this Court has affirmed that the rulings, circular, rules and regulations promulgated by the CIR would have no retroactive application if to so apply them would be prejudicial to the taxpayers. In fact, both petitioner and respondent agree that the retroactive application of VAT Ruling No. 008-92 is valid only if such application would not be prejudicial to the respondent-pursuant to the explicit mandate under Sec. 246 of the NIRC, thus:
Sec. 246. Non-retroactivity of rulings.—Any revocation, modification or reversal of any of the rules and regulationspromulgated in accordance with the preceding Section or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers except in the following cases: (a) where the taxpayer deliberately misstates or omits material facts from his return on any document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different form the facts on which the ruling is based; or (c) where the taxpayer acted in bad faith. (Emphasis supplied)
In that regard, petitioner submits that respondent would not be prejudiced by a retroactive application; respondent maintains the contrary. Consequently, the determination of the issue of retroactivity hinges on whether respondent would suffer prejudice from the retroactive application of VAT Ruling No. 008-92.
We agree with the Court of Appeals and the respondent.
To begin with, the determination of whether respondent had suffered prejudice is a factual issue. It is an established rule that in the exercise of its power of review, the Supreme Court is not a trier of facts. Moreover, in the exercise of the Supreme Court’s power of review, the findings of facts of the Court of Appeals are conclusive and binding on the Supreme Court. An exception to this rule is when the findings of fact a quo are conflicting, as is in this case.
VAT is a percentage tax imposed at every stage of the distribution process on the sale, barter, exchange or lease of goods or properties and rendition of services in the course of trade or business, or the importation of goods. It is an indirect tax, which may be shifted to the buyer, transferee, or lessee of the goods, properties, or services. However, the party directly liable for the payment of the tax is the seller.
In transactions taxed at a 10% rate, when at the end of any given taxable quarter the output VAT exceeds the input VAT, the excess shall be paid to the government; when the input VAT exceeds the output VAT, the excess would be carried over to VAT liabilities for the succeeding quarter or quarters. On the other hand, transactions which are taxed at zero-rate do not result in any output tax. Input VAT attributable to zero-rated sales could be refunded or credited against other internal revenue taxes at the option of the taxpayer.
To illustrate, in a zero-rated transaction, when a VAT-registered person (“taxpayer”) purchases materials from his supplier at P80.00, P7.30 of which was passed on to him by his supplier as the latter’s 10% output VAT, the taxpayer is allowed to recover P7.30 from the BIR, in addition to other input VAT he had incurred in relation to the zero-rated transaction, through tax credits or refunds. When the taxpayer sells his finished product in a zero-rated transaction, say, for P110.00, he is not required to pay any output VAT thereon. In the case of a transaction subject to 10% VAT, the taxpayer is allowed to recover both the input VAT of P7.30 which he paid to his supplier and his output VAT of P2.70 (10% the P30.00 value he has added to the P80.00 material) by passing on both costs to the buyer. Thus, the buyer pays the total 10% VAT cost, in this case P10.00 on the product.
In both situations, the taxpayer has the option not to carry any VAT cost because in the zero-rated transaction, the taxpayer is allowed to recover input tax from the BIR without need to pay output tax, while in 10% rated VAT, the taxpayer is allowed to pass on both input and output VAT to the buyer. Thus, there is an elemental similarity between the two types of VAT ratings in that the taxpayer has the option not to take on any VAT payment for his transactions by simply exercising his right to pass on the VAT costs in the manner discussed above.
Proceeding from the foregoing, there appears to be no upfront economic difference in changing the sale of gold to the Central Bank from a 0% to 10% VAT rate provided that respondent would be allowed the choice to pass on its VAT costs to the Central Bank. In the instant case, the retroactive application of VAT Ruling No. 008-92 unilaterally forfeited or withdrew this option of respondent. The adverse effect is that respondent became the unexpected and unwilling debtor to the BIR of the amount equivalent to the total VAT cost of its product, a liability it previously could have recovered from the BIR in a zero-rated scenario or at least passed on to the Central Bank had it known it would have been taxed at a 10% rate. Thus, it is clear that respondent suffered economic prejudice when its consummated sales of gold to the Central Bank were taken out of the zero-rated category. The change in the VAT rating of respondent’s transactions with the Central Bank resulted in the twin loss of its exemption from payment of output VAT and its opportunity to recover input VAT, and at the same time subjected it to the 10% VAT sans the option to pass on this cost to the Central Bank, with the total prejudice in money terms being equivalent to the 10% VAT levied on its sales of gold to the Central Bank.
Petitioner had made its position hopelessly untenable by arguing that “the deficiency 10% that may be assessable will only be equal to 1/11th of the amount billed to the [Central Bank] rather than 10% thereof. In short, [respondent] may only be charged based on the tax amount actually and technically passed on to the [Central Bank] as part of the invoiced price.” To the Court, the aforequoted statement is a clear recognition that respondent would suffer prejudice in the “amount actually and technically passed on to the [Central Bank] as part of the invoiced price.” In determining the prejudice suffered by respondent, it matters little how the amount charged against respondent is computed, the point is that the amount (equal to 1/11th of the amount billed to the Central Bank) was charged against respondent, resulting in damage to the latter.
Petitioner posits that the retroactive application of BIR VAT Ruling No. 008-92 is stripped of any prejudicial effect when viewed in relation to several available options to recoup whatever liabilities respondent may have incurred, i.e., respondent’s input VAT may still be used (1) to offset its output VAT on the sales of gold to the Central Bank or on its output VAT on other sales subject to 10% VAT, and (2) as deductions on its income tax under Sec. 29 of the Tax Code.
On petitioner’s first suggested recoupment modality, respondent counters that its other sales subject to 10% VAT are so minimal that this mode is of little value. Indeed, what use would a credit be where there is nothing to set it off against? Moreover, respondent points out that after having been imposed with 10% VAT sans the opportunity to pass on the same to the Central Bank, it was issued a deficiency tax assessment because its input VAT tax credits were not enough to offset the retroactive 10% output VAT. The prejudice then experienced by respondent lies in the fact that the tax refunds/credits that it expected to receive had effectively disappeared by virtue of its newfound output VAT liability against which petitioner had offset the expected refund/credit. Additionally, the prejudice to respondent would not simply disappear, as petitioner claims, when a liability (which liability was not there to begin with) is imposed concurrently with an opportunity to reduce, not totally eradicate, the newfound liability. In sum, contrary to petitioner’s suggestion, respondent’s net income still decreased corresponding to the amount it expected as its refunds/credits and the deficiency assessments against it, which when summed up would be the total cost of the 10% retroactive VAT levied on respondent.
Respondent claims to have incurred further prejudice. In computing its income taxes for the relevant years, the input VAT cost that respondent had paid to its suppliers was not treated by respondent as part of its cost of goods sold, which is deductible from gross income for income tax purposes, but as an asset which could be refunded or applied as payment for other internal revenue taxes. In fact, Revenue Regulation No. 5-87 (VAT Implementing Guidelines), requires input VAT to be recorded not as part of the cost of materials or inventory purchased but as a separate entry called “input taxes,” which may then be applied against output VAT, other internal revenue taxes, or refunded as the case may be. In being denied the opportunity to deduct the input VAT from its gross income, respondent’s net income was overstated by the amount of its input VAT. This overstatement was assessed tax at the 32% corporate income tax rate, resulting in respondent’s overpayment of income taxes in the corresponding amount. Thus, respondent not only lost its right to refund/ credit its input VAT and became liable for deficiency VAT, it also overpaid its income tax in the amount of 32% of its input VAT.
This leads us to the second recourse that petitioner has suggested to offset any resulting prejudice to respondent as a consequence of giving retroactive effect to BIR VAT Ruling No. 008-92. Petitioner submits that granting that respondent has no other sale subject to 10% VAT against which its input taxes may be used in payment, then respondent is constituted as the final entity against which the costs of the tax passes-on shall legally stop; hence, the input taxes may be converted as costs available as deduction for income tax purposes.
Even assuming that the right to recover respondent’s excess payment of income tax has not yet prescribed, this relief would only address respondent’s overpayment of income tax but not the other burdens discussed above. Verily, this remedy is not a feasible option for respondent because the very reason why it was issued a deficiency tax assessment is that its input VAT was not enough to offset its retroactive output VAT. Indeed, the burden of having to go through an unnecessary and cumbersome refund process is prejudice enough. Moreover, there is in fact nothing left to claim as a deduction from income taxes.
From the foregoing it is clear that petitioner’s suggested options by which prejudice would be eliminated from a retroactive application of VAT Ruling No. 008-92 are either simply inadequate or grossly unrealistic.
At the time when the subject transactions were consummated, the prevailing BIR regulations relied upon by respondent ordained that gold sales to the Central Bank were zero-rated. The BIR interpreted Sec. 100 of the NIRC in relation to Sec. 2 of EO No. 581 s. 1980 which prescribed that gold sold to the Central Bank shall be considered export and therefore shall be subject to the export and premium duties. In coming out with this interpretation, the BIR also considered Sec. 169 of Central Bank Circular No. 960 which states that all sales of gold to the Central Bank are considered constructive exports. Respondent should not be faulted for relying on the BIR’s interpretation of the said laws and regulations. While it is true, as petitioner alleges, that government is not estopped from collecting taxes which remain unpaid on account of the errors or mistakes of its agents and/or officials and there could be no vested right arising from an erroneous interpretation of law, these principles must give way to exceptions based on and in keeping with the interest of justice and fairplay, as has been done in the instant matter. For, it is primordial that every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith.
The case of ABS-CBN Broadcasting Corporation v. Court of Tax Appeals [195 Phil. 33 (1981)] involved a similar factual milieu. There the CIR issued Memorandum Circular No. 4-71 revoking an earlier circular for being “erroneous for lack of legal basis.” When the prior circular was still in effect, petitioner therein relied on it and consummated its transactions on the basis thereof. We held, thus:
. . . .Petitioner was no longer in a position to withhold taxes due from foreign corporations because it had already remitted all film rentals and no longer had any control over them when the new Circular was issued. . . .
. . . .
This Court is not unaware of the well-entrenched principle that the [g]overnment is never estopped from collecting taxes because of mistakes or errors on the part of its agents. But, like other principles of law, this also admits of exceptions in the interest of justice and fairplay. . . .In fact, in the United States, . . . it has been held that the Commissioner [of Internal Revenue] is precluded from adopting a position inconsistent with one previously taken where injustice would result therefrom or where there has been a misrepresentation to the taxpayer.
Respondent, in this case, has similarly been put on the receiving end of a grossly unfair deal. Before respondent was entitled to tax refunds or credits based on petitioner’s own issuances. Then suddenly, it found itself instead being made to pay deficiency taxes with petitioner’s retroactive change in the VAT categorization of respondent’s transactions with the Central Bank. This is the sort of unjust treatment of a taxpayer which the law in Sec. 246 of the NIRC abhors and forbids.
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We start with the well-entrenched rule that rulings and circulars, rules and regulations, promulgated by the CIR, would have no retroactive application if to so apply them would be prejudicial to the taxpayers.
And this is as it should be, for the Tax Code, specifically Section 246 thereof, is explicit that:
x x x Any revocation, modification, or reversal of any rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner of Internal Revenue shall not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayers except in the following cases: a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or c) where the taxpayer acted in bad faith.
There is no question, therefore, as to the prohibition against the retroactive application of the revocation, modification or reversal, as the case maybe, of previously established BIR Rulings when the taxpayer’s interest would be prejudiced thereby. But even if prejudicial to a taxpayer, retroactive application is still allowed where: (a) a taxpayer deliberately misstates or omits material facts from his return or any document required by the BIR; (b) where subsequent facts gathered by the BIR are materially different from which the ruling is based; and (c) where the taxpayer acted in bad faith.
As admittedly, respondent’s case does not fall under any of the above exceptions, what is crucial to determine then is whether the retroactive application of VAT Ruling No. 008-92 would be prejudicial to respondent Benguet Corporation.
The Court resolves the question in the affirmative.
Input VAT or input tax represents the actual payments, costs and expenses incurred by a VAT-registered taxpayer in connection with his purchase of goods and services. Thus, “input tax” means the value-added tax paid by a VAT-registered person/entity in the course of his/its trade or business on the importation of goods or local purchases of goods or services from a VAT-registered person.
On the other hand, when that person or entity sells his/its products or services, the VAT-registered taxpayer generally becomes liable for 10% of the selling price as output VAT or output tax. Hence, “output tax” is the value-added tax on the sale of taxable goods or services by any person registered or required to register under Section 107 of the (old) Tax Code.
The VAT system of taxation allows a VAT-registered taxpayer to recover its input VAT either by (1) passing on the 10% output VAT on the gross selling price or gross receipts, as the case may be, to its buyers, or (2) if the input tax is attributable to the purchase of capital goods or to zero-rated sales, by filing a claim for a refund or tax credit with the BIR.
Simply stated, a taxpayer subject to 10% output VAT on its sales of goods and services may recover its input VAT costs by passing on said costs as output VAT to its buyers of goods and services but it cannot claim the same as a refund or tax credit, while a taxpayer subject to 0% on its sales of goods and services may only recover its input VAT costs by filing a refund or tax credit with the BIR.
Here, the claimed tax credit of input tax amounting to P49,749,223.31 represents the costs or expenses incurred by respondent in connection with its gold production. Relying on BIR Rulings, specifically VAT Ruling No. 378-88, dated August 28, 1988, and VAT Ruling No. 59-88, dated December 14, 1988, both of which declared that sales of gold to the CB are considered export sales subject to 0%, respondent sold gold to the CB from January 1, 1988 to July 31, 1989 without passing on to the latter its input VAT costs, obviously intending to obtain a refund or credit thereof from the BIR at the end of the taxable period. However, by the time respondent applied for refund/credit of its input VAT costs, VAT Ruling No. 008-92 dated January 23, 1992, treating sales of gold to the CB as domestic sales subject to 10% VAT, and VAT Ruling No. 059-92 dated April 28, 1992, retroactively applying said VAT Ruling No. 008-92 to such sales made from January 1, 1988 onwards, were issued. As a result, respondent’s application for refund/credit was denied and, as likewise found by the CA, it was even subsequently assessed deficiency output VAT on October 19, 1992 in the total amounts of P252,283,241.95 for the year 1988, and P244,318,148.56 for the year 1989.
Clearly, from the foregoing, the prejudice to respondent by the retroactive application of VAT Ruling No. 008-92 to its sales of gold to the CB from January 1, 1988 to July 31, 1989 is patently evident.
Verily, by reason of the denial of its claim for refund/credit, respondent has been precluded from recovering its input VAT costs attributable to its sales of gold to the CB during the period mentioned, for the following reasons:
First, because respondent could not pass on to the CB the 10% output VAT which would be retroactively imposed on said transactions, not having passed the same at the time the sales were made on the assumption that said sales are subject to 0%, and, hence, maybe refunded or credited later. And second, because respondent could not claim the input VAT costs as a refund/credit as it has been prevented such option, the sales in question having been retroactively subjected to 10% VAT, ergo limiting recovery of said costs to the application of the same against the output tax which will result therefrom.
Indeed, respondent stands to suffer substantial economic prejudice by the retroactive application of the VAT Ruling in question.
But petitioner maintains otherwise, arguing that respondent will not be unduly prejudiced since there are still other available remedies for it to recover its input VAT costs. Said remedies, so petitioner points out, are for respondent to either (1) use said input taxes in paying its output taxes in connection with its other sales transactions which are subject to the 10% VAT or (2) if there are no other sales transactions subject to 10% VAT, treat the input VAT as cost and deduct the same from income for income tax purposes.
We are not persuaded.
The first remedy cannot be applied in this case. As correctly found by the CA, respondent has clearly shown that it has no “other transactions” subject to 10% VAT, and petitioner has failed to prove the existence of such “other transactions” against which to set off respondent’s input VAT.
Anent the second remedy, prejudice will still, indubitably, result because treating the input VAT as an income tax deductible expense will yield only a partial and not full financial benefit of having the input VAT refunded or used as a tax credit. We quote with approval the CA’s observations in this respect, thus:
x x x even assuming that input VAT is still available for deduction, [respondent] still suffers prejudice. As a zero-rated taxpayer (pursuant to the 1988 to 1990 BIR issuances), [respondent] could have claimed a cash refund or tax credit of the input VAT in the amount of P49,749,223.31. If it had been allowed a cash refund or tax credit, it could have used the full amount thereof to pay its other tax obligations (or, in the case of a cash refund, to fund its operations). With VAT Ruling No. 059-92, [respondent] is precluded from claiming the cash refund or tax credit and is limited to the so-called remedy of deducting the input VAT from gross income. But a cash refund or tax credit is not the same as a tax deduction. A tax deduction has less benefits than a tax credit. Consider the following differences;
2.42.1 A tax credit may be used to pay any national internal revenue tax liability. Section 104(b) of the Tax Code states;
“(b) Excess output or input tax. – xxx Any input tax attributable to xxx zero-rated sales by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes, subject to the provisions of Section 106.”
On the other hand, a tax deduction may be used only against gross income for purposes of income tax. A tax deduction is not allowed against other internal revenue taxes such as excise taxes, documentary stamp taxes, and output VAT.
2.42.2 In terms of income tax, a tax deduction is only an expense item in computing income tax liabilities (Sections 27 to 29, Tax Code) while a tax credit is a direct credit against final income tax due (Section 106[b], Tax Code). This is illustrated in the example below:
Assume that in 1988, respondent had a gross income of P1,000,000,000 and deductible expenses in general (such as salaries, utilities, transportation, fuel and costs of sale) of P500,000,000. Assume also that [respondent] had input VAT of P131,741,034.22, the amount being claimed in the instant case. [Respondent’s] income tax liability, depending on whether it utilized the input tax as tax credit or tax deduction, would be as follows:
(Please refer to the full text of the SC Decision)
Thus, if the input VAT of P131,741,034.22 were to be credited against the income tax due, the income tax payable is only P43,258,965.78. On the other hand, if the input VAT were to be deducted from gross income before arriving at the net income, the income tax payable is P128,890,638.02. This is almost three (3) times the income tax payable if the input VAT were to be deducted from the income tax payable.
As can be seen from above, there is a substantial difference between a tax credit and a tax deduction. A tax credit reduces tax liability while a tax deduction only reduces taxable income (emphasis supplied).
A tax credit of input VAT fully utilizes the entire amount of P131,741,034.22, since tax liability is reduced by the said amount. A tax deduction is not fully utilized because the savings is only 35% or P46,109,361.98. In the above case, therefore, the use of input VAT as a tax deduction results in a loss of 65% of the input VAT, or P85,631,672.24, which [respondent] could have otherwise fully utilized as a tax credit.
x x x x x x x x x
x x x the deduction of an expense under Section 29 of the Tax Code is not tantamount to a recovery of the expense. The deduction of a bad debt, for instance, does not result in the recovery of the debt. On the other hand, a tax credit, because it can be fully utilized to reduce tax liability, is as good as cash and is thus effectively a full recovery of the input VAT cost. (Emphasis in the original; Words in brackets supplied).
We may add that the prejudice which befell respondent is all the more highlighted by the fact that it has been issued assessments for deficiency output VAT on the basis of the same sales of gold to the CB.
On a final note, the Court is fully cognizant of the well-entrenched principle that the Government is not estopped from collecting taxes because of mistakes or errors on the part of its agents. But, like other principles of law, this also admits of exceptions in the interest of justice and fair play, as where injustice will result to the taxpayer.
As this Court has said in ABS-CBN Broadcasting Corporation v. CTA and the CIR (G.R. No. L-52306, 12 October 1981):
The insertion of Sec. 338-A [now Sec. 246] into the National Internal Revenue Code x x x is indicative of legislative intention to support the principle of good faith. In fact, in the United States x x x it has been held that the Commissioner or Collector is precluded from adopting a position inconsistent with one previously taken where injustice would result therefrom, or where there has been a misrepresentation to the taxpayer. [Word in brackets supplied].
Here, when respondent sold gold to the CB, it relied on the formal assurances of the BIR, i.e., VAT Ruling No. 378-88 dated August 28, 1988 and VAT Ruling RMC No. 59-88 dated December 14, 1988, that such sales are zero-rated. To retroact a later ruling ” VAT Ruling No. 008-92 – revoking the grant of zero-rating status to the sales of gold to the CB and applying a new and contrary position that such sales are now subject to 10%, is clearly inconsistent with justice and the elementary requirements of fair play.
Accordingly, we find that the CA did not commit a reversible error in holding that VAT Ruling No. 008-92 cannot be retroactively applied to respondent’s sales of gold to the CB during the period January 1, 1988 to July 31, 1989, hence, it is entitled to tax credit in the amount of P49,749,223.31 attributable to such sales.
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In case of discrepancy between the law as amended and its implementing but old regulation, the former necessarily prevails.
Neither Section 229 nor RR 12-85 can prevail over Section 228 of the Tax Code.
No doubt, Section 228 has replaced Section 229. The provision on protesting an assessment has been amended. Furthermore, in case of discrepancy between the law as amended and its implementing but old regulation, the former necessarily prevails. Thus, between Section 228 of the Tax Code and the pertinent provisions of RR 12-85, the latter cannot stand because it cannot go beyond the provision of the law. The law must still be followed, even though the existing tax regulation at that time provided for a different procedure. The regulation then simply provided that notice be sent to the respondent in the form prescribed, and that no consequence would ensue for failure to comply with that form.
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Adjudicatory power of the CIR.
The Commissioner exercises administrative adjudicatory power or quasi-judicial function in adjudicating the rights and liabilities of persons under the Tax Code.
Quasi-judicial power has been described as:
Quasi-judicial or administrative adjudicatory power on the other hand is the power of the administrative agency to adjudicate the rights of persons before it. It is the power to hear and determine questions of fact to which the legislative policy is to apply and to decide in accordance with the standards laid down by the law itself in enforcing and administering the same law. The administrative body exercises its quasi-judicial power when it performs in a judicial manner an act which is essentially of an executive or administrative nature, where the power to act in such manner is incidental to or reasonably necessary for the performance of the executive or administrative duty entrusted to it. (Emphasis supplied, citations omitted)
In carrying out these quasi-judicial functions, the Commissioner is required to “investigate facts or ascertain the existence of facts, hold hearings, weigh evidence, and draw conclusions from them as basis for their official action and exercise of discretion in a judicial nature.” Tax investigation and assessment necessarily demand the observance of due process because they affect the proprietary rights of specific persons.
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The power to make assessments, and to collect taxes.
As the BIR’s chief, the CIR has the power to make assessments and prescribe additional requirements for tax administration and enforcement.
*******
Tax collection is part and parcel of the CIR’s power to make assessments and prescribe additional requirements for tax administration and enforcement.
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The authority to make tax assessments may be delegated to subordinate officers.
The general rule is that the CIR may delegate any power vested upon him by law to Division Chiefs or to officials of higher rank. He cannot, however, delegate the four powers granted to him under the NIRC enumerated in Section 7.
As amended by RA No. 8424, Section 7 of the Code authorizes the BIR Commissioner to delegate the powers vested in him under the pertinent provisions of the Code to any subordinate official with the rank equivalent to a division chief or higher, except the following:
(a) The power to recommend the promulgation of rules and regulations by the Secretary of Finance;
(b) The power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the Bureau;
(c) The power to compromise or abate under Section 204(A) and (B) of this Code, any tax deficiency: Provided, however, that assessments issued by the Regional Offices involving basic deficiency taxes of five hundred thousand pesos (P500,000) or less, and minor criminal violations as may be determined by rules and regulations to be promulgated by the Secretary of Finance, upon the recommendation of the Commissioner, discovered by regional and district officials, may be compromised by a regional evaluation board which shall be composed of the Regional Director as Chairman, the Assistant Regional Director, heads of the Legal, Assessment and Collection Divisions and the Revenue District Officer having jurisdiction over the taxpayer, as members; and
(d) The power to assign or reassign internal revenue officers to establishments where articles subject to excise tax are produced or kept.
It is clear from the above provision that the act of issuance of the demand letter by the Chief of the Accounts Receivable and Billing Division does not fall under any of the exceptions that have been mentioned as non-delegable.
Section 6 of the Code further provides:
“SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and Enforcement. –
(A) Examination of Returns and Determination of Tax Due. – After a return has been filed as required under the provisions of this Code, the Commissioner or his duly authorized representative may authorize the examination of any taxpayer and the assessment of the correct amount of tax; Provided, however, That failure to file a return shall not prevent the Commissioner from authorizing the examination of any taxpayer.
The tax or any deficiency tax so assessed shall be paid upon notice and demand from the Commissioner or from his duly authorized representative. . . .” (Emphasis supplied)
Thus, the authority to make tax assessments may be delegated to subordinate officers. Said assessment has the same force and effect as that issued by the Commissioner himself, if not reviewed or revised by the latter such as in this case.
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The power to file tax collection cases may be delegated by the CIR.
To implement [Section 221 of the NIRC] (now Section 220 of the NIRC of 1997), Revenue Administrative Order (RAO) No. 5-83 of the BIR provides in pertinent portions:
The following civil and criminal cases are to be handled by Special Attorneys and Special Counsels assigned in the Legal Branches of Revenue Regions:
. . . .
II. Civil Cases
1. Complaints for collection on cases falling within the jurisdiction of the Region . . . .
In all the abovementioned cases, the Regional Director is authorized to sign all pleadings filed in connection therewith which, otherwise, requires the signature of the Commissioner.
. . . .
RAO No. 10-95 specifically authorizes the Litigation and Prosecution Section of the Legal Division of regional district offices to institute the necessary civil and criminal actions for tax collection. As the complaint filed in this case was signed by the BIR’s Chief of Legal Division for Region 4 and verified by the Regional Director, there was, therefore, compliance with the law.
However, the lower court refused to recognize RAO No. 10-95 and, by implication, RAO No. 5-83. It held
[M]emorand[a], circulars and orders emanating from bureaus and agencies whether in the purely public or quasi-public corporations are mere guidelines for the internal functioning of the said offices. They are not laws which courts can take judicial notice of. As such, they have no binding effect upon the courts for such memorand[a] and circulars are not the official acts of the legislative, executive and judicial departments of the Philippines . . . .
This is erroneous. The rule is that as long as administrative issuances relate solely to carrying into effect the provisions of the law, they are valid and have the force of law. The governing statutory provision in this case is §4(d) of the NIRC which provides:
Specific provisions to be contained in regulations. – The regulations of the Bureau of Internal Revenue shall, among other things, contain provisions specifying, prescribing, or defining:
. . . .
(d) The conditions to be observed by revenue officers, provincial fiscals and other officials respecting the institution and conduct of legal actions and proceedings.
RAO Nos. 5-83 and 10-95 are in harmony with this statutory mandate.
As amended by RA No. 8424, the NIRC is now even more categorical. Sec. 7 of the present Code authorizes the BIR Commissioner to delegate the powers vested in him under the pertinent provisions of the Code to any subordinate official with the rank equivalent to a division chief or higher, except the following:
(a) The power to recommend the promulgation of rules and regulations by the Secretary of Finance;
(b) The power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the Bureau;
(c) The power to compromise or abate under §204(A) and (B) of this Code, any tax deficiency: Provided, however, that assessments issued by the Regional Offices involving basic deficiency taxes of five hundred thousand pesos (P500,000.00) or less, and minor criminal violations as may be determined by rules and regulations to be promulgated by the Secretary of Finance, upon the recommendation of the Commissioner, discovered by regional and district officials, may be compromised by a regional evaluation board which shall be composed of the Regional Director as Chairman, the Assistant Regional Director, heads of the Legal, Assessment and Collection Divisions and the Revenue District Officer having jurisdiction over the taxpayer, as members; and
(d) The power to assign or reassign internal revenue officers to establishments where articles subject to excise tax are produced or kept.
None of the exceptions relates to the Commissioner’s power to approve the filing of tax collection cases.
~~~RP vs. Hizon (G.R. No. 130430, 13 December 1999, 2nd Div., J. Mendoza)
cf.: RDAO No. 2-2007
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Power to make assessments; Best evidence obtainable consists of hearsay evidence, but not photocopies.
The CIR has the power to make assessments and prescribe additional requirements for tax administration and enforcement. Among such powers are those provided in paragraph (b) [of Section 16 of the NIRC of 1977, as amended (now Section 6(B), NIRC of 1997)], which we quote:
(b) Failure to submit required returns, statements, reports and other documents. – When a report required by law as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by law or regulation or when there is reason to believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the proper tax on the best evidence obtainable.
In case a person fails to file a required return or other document at the time prescribed by law, or willfully or otherwise files a false or fraudulent return or other document, the Commissioner shall make or amend the return from his own knowledge and from such information as he can obtain through testimony or otherwise, which shall be prima facie correct and sufficient for all legal purposes.
This provision applies when the CIR undertakes to perform her administrative duty of assessing the proper tax against a taxpayer, to make a return in case of a taxpayer’s failure to file one, or to amend a return already filed in the BIR.
The petitioner may avail herself of the best evidence or other information or testimony by exercising her power or authority under paragraphs (1) to (4) of Section 7 of the NIRC [paragraphs (A) to (D) of Section 5, NIRC of 1997]:
(1) To examine any book, paper, record or other data which may be relevant or material to such inquiry;
(2) To obtain information from any office or officer of the national and local governments, government agencies or its instrumentalities, including the Central Bank of the Philippines and government owned or controlled corporations;
(3) To summon the person liable for tax or required to file a return, or any officer or employee of such person, or any person having possession, custody, or care of the books of accounts and other accounting records containing entries relating to the business of the person liable for tax, or any other person, to appear before the Commissioner or his duly authorized representative at a time and place specified in the summons and to produce such books, papers, records, or other data, and to give testimony;
(4) To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry; …
The “best evidence” envisaged in Section 16 of the 1977 NIRC, as amended [now Section 6(B), NIRC of 1997], includes the corporate and accounting records of the taxpayer who is the subject of the assessment process, the accounting records of other taxpayers engaged in the same line of business, including their gross profit and net profit sales. Such evidence also includes data, record, paper, document or any evidence gathered by internal revenue officers from other taxpayers who had personal transactions or from whom the subject taxpayer received any income; and record, data, document and information secured from government offices or agencies, such as the SEC, the Central Bank of the Philippines, the Bureau of Customs, and the Tariff and Customs Commission.
The law allows the BIR access to all relevant or material records and data in the person of the taxpayer. It places no limit or condition on the type or form of the medium by which the record subject to the order of the BIR is kept. The purpose of the law is to enable the BIR to get at the taxpayer’s records in whatever form they may be kept. Such records include computer tapes of the said records prepared by the taxpayer in the course of business. In this era of developing information-storage technology, there is no valid reason to immunize companies with computer-based, record-keeping capabilities from BIR scrutiny. The standard is not the form of the record but where it might shed light on the accuracy of the taxpayer’s return.
In Campbell, Jr. v. Guetersloh [287F.2d 878 (1961)], the United States (U.S.) Court of Appeals (5th Circuit) declared that it is the duty of the CIR to investigate any circumstance which led him to believe that the taxpayer had taxable income larger than reported. Necessarily, this inquiry would have to be outside of the books because they supported the return as filed. He may take the sworn testimony of the taxpayer; he may take the testimony of third parties; he may examine and subpoena, if necessary, traders’ and brokers’ accounts and books and the taxpayer’s book accounts. The Commissioner is not bound to follow any set of patterns. The existence of unreported income may be shown by any practicable proof that is available in the circumstances of the particular situation. Citing its ruling in Kenney v. Commissioner (111 F.2d 374), the U.S. appellate court declared that where the records of the taxpayer are manifestly inaccurate and incomplete, the Commissioner may look to other sources of information to establish income made by the taxpayer during the years in question.
We agree with the contention of the petitioner that the best evidence obtainable may consist of hearsay evidence, such as the testimony of third parties or accounts or other records of other taxpayers similarly circumstanced as the taxpayer subject of the investigation, hence, inadmissible in a regular proceeding in the regular courts. Moreover, the general rule is that administrative agencies such as the BIR are not bound by the technical rules of evidence. It can accept documents which cannot be admitted in a judicial proceeding where the Rules of Court are strictly observed. It can choose to give weight or disregard such evidence, depending on its trustworthiness.
However, the best evidence obtainable under Section 16 of the 1977 NIRC, as amended (now Section 6(B), NIRC of 1997)], does not include mere photocopies of records/documents. The petitioner, in making a preliminary and final tax deficiency assessment against a taxpayer, cannot anchor the said assessment on mere machine copies of records/documents. Mere photocopies of the Consumption Entries have no probative weight if offered as proof of the contents thereof. The reason for this is that such copies are mere scraps of paper and are of no probative value as basis for any deficiency income or business taxes against a taxpayer. Indeed, in United States v. Davey [543 F.2d 996 (1976)], the U.S. Court of Appeals (2nd Circuit) ruled that where the accuracy of a taxpayer’s return is being checked, the government is entitled to use the original records rather than be forced to accept purported copies which present the risk of error or tampering.
In Collector of Internal Revenue v. Benipayo [4 SCRA 182 (1962)], the Court ruled that the assessment must be based on actual facts. The rule assumes more importance in this case since the xerox copies of the Consumption Entries furnished by the informer of the EIIB were furnished by yet another informer. While the EIIB tried to secure certified copies of the said entries from the Bureau of Customs, it was unable to do so because the said entries were allegedly eaten by termites. The Court can only surmise why the EIIB or the BIR, for that matter, failed to secure certified copies of the said entries from the Tariff and Customs Commission or from the National Statistics Office which also had copies thereof. It bears stressing that under Section 1306 of the Tariff and Customs Code, the Consumption Entries shall be the required number of copies as prescribed by regulations. The Consumption Entry is accomplished in sextuplicate copies and quadruplicate copies in other places. In Manila, the six copies are distributed to the Bureau of Customs, the Tariff and Customs Commission, the Declarant (Importer), the Terminal Operator, and the Bureau of Internal Revenue. Inexplicably, the Commissioner and the BIR personnel ignored the copy of the Consumption Entries filed with the BIR and relied on the photocopies supplied by the informer of the EIIB who secured the same from another informer. The BIR, in preparing and issuing its preliminary and final assessments against the respondent, even ignored the records on the investigation made by the District Revenue officers on the respondent’s importations for 1987.
The original copies of the Consumption Entries were of prime importance to the BIR. This is so because such entries are under oath and are presumed to be true and correct under penalty of falsification or perjury. Admissions in the said entries of the importers’ documents are admissions against interest and presumptively correct.
In fine, then, the petitioner acted arbitrarily and capriciously in relying on and giving weight to the machine copies of the Consumption Entries in fixing the tax deficiency assessments against the respondent.
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