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Revenue rule 7-2001 too good to refuse

IF, FOR one reason or another, you were not convinced by the Erap administration’s campaign last year to enter into a compromise of your unpaid tax liabilities, you now have a second opportunity to settle with the BIR, this time under the better terms offered by the Arroyo government. Unveiled by the BIR on the occasion of its anniversary celebrations recently, Revenue Regulations No. 7-2001 adds not a few sweeteners to the administrative compromise program that was previously conceded by Revenue Regulations No. 6-2000.

Both revenue regulations are in implementation of Section 204 (A) of the Tax Code. That section authorizes the commissioner to compromise the payment of any internal revenue tax when (a) a reasonable doubt as to the validity of the claim against the taxpayer exists, or (b) the financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. In the spelling out of those conditions is where the two regulations differ.

The first point of distinction is in the listing of what cases may and what cases may not be subject of compromise.

Both regulations permit the compromise of delinquent accounts, of cases under administrative protest pending with the Bureau, of disputed assessments pending before the Court of Tax Appeals, the Court of Appeals and the Supreme Court; of collection cases filed with the regular courts, and of criminal violations, before they are filed in court, except those involving criminal fraud. To these, Rev. Reg. No. 7-2001 adds a new category, namely, where the taxpayer, after having received a pre-assessment notice and presented his case, nevertheless disagrees with the findings of the audit office as confirmed by the review office. The idea behind the addition is to give the taxpayer an opportunity to accept a lower liability instead of putting up what could turn out to be a costly but futile struggle at the formal protest level.

Similarly, both regulations do not allow compromise of withholding tax cases, tax fraud cases, criminal violations already filed in court and delinquent accounts with a duly approved schedule of installment payments. But Rev. Reg. No. 7-2001 adds two more exclusions: first, cases where, upon termination of the process of reinvestigation or reconsideration, the final report reduced the original assessment and the taxpayer had agreed to the reduction; and, second, following the thrust of long-standing jurisprudence (Rovero v. Amparo, 91 Phil 228), cases which have already become final and executory after final judgment by a court.

Having circumscribed the areas where compromise is permissible, Rev. Reg. No. 7-2001 then proceeds to establish when a reasonable doubt exists as to the validity of an assessment. The first six instances, namely, (a) jeopardy assessments; (b) arbitrary assessments based on presumptions; (c) assessments without legal or factual basis but (1) were not protested by the taxpayer on time for failure to receive notice thereof, (2) were not asked by the taxpayer to be reconsidered or reinvestigated; (3) were not appealed to the Court of Tax Appeals; and (d) assessments issued starting 1998 that did not comply with the form and substance requirements of Section 228 of the Tax Code were also in Reg. Reg. No. 6-2000. A seventh, however, was added by Rev. Reg. No. 7-2001, i.e. assessments made by the Commissioner based on the "best obtainable evidence" rule.

The "best obtainable evidence" rule is a drastic power vested on the Commissioner by Section 6 (B) of the Tax Code. The Commissioner is authorized to make his own assessment of any internal revenue tax, based on the "best evidence obtainable", whenever the taxpayer fails to file a report required by law to be basis of the computation of the tax due. It runs counter to the general self-assessment feature of most national internal revenue taxes but is nevertheless permitted by law because the taxpayer himself fails to provide the basis for the correct assessment of his liability. Taxpayer’s default leaves the government is left with no choice but to make an assessment on behalf of the taxpayer albeit based only on evidence accessible to it.

In many cases, however, what is "best obtainable" is one-sided in favor of the tax collector and disadvantageous to the taxpayer. Rev. Reg. No. 7-2001 thus mitigates the harshness of the "best evidence obtainable" rule by allowing the taxpayer to obtain some relief by seeking a reasonable compromise.

The other statutory justification for a compromise—financial incapacity—is essentially subjective and the regulations labor to pin down objective facts that ordinarily would be appropriate indicia of financial incapacity. Reflective of the simple ways of the previous administration, Rev. Reg. No. 6-2000 accepted only four. The present regulations speak of five. But the difference in number does not reflect the obvious pains taken by the present leadership in the BIR to ensure that the taxpayer is not engaging in financial malingering. A detailed examination of the refined ratios would be too tedious for this piece. But worth pointing out is the welcome addition to instances showing financial incapacity is a moratorium or suspension of payments granted a taxpayer by the SEC or the courts.

So how much compromise payment is acceptable to the government? The Tax Code actually sets the parameters: for compromises grounded on financial incapacity, the minimum the commissioner can accept is 10 percent of the basic assessed tax; for reasonable doubt, it is 40 percent (Sec. 204(A)(2), R.A. No. 8424). Rev. Reg. No 7-2001 readily accepts the minimum of 10 percent for financial incapacity, except in the case of dissolved corporations, of non-operating companies which have not been in operation for less than three years, and of operating corporations whose surplus or earnings deficit result in impairment in the original capital by at least 50 percent. The minimum for these ill-stared corporations is 20 percent.

For compromise payments based on the nebulous ground of reasonable doubt, the new regulations stick to 40 percent. However, a window is slightly open for a lower payment if the taxpayer submits a written request detailing his reasons for a more lenient treatment. Lest the office be seized by a burst of generosity, approval of the National Evaluation Board, headed by the commissioner himself and requiring his affirmative vote, is required.

Nowadays, peace of mind, in tax or other matters, is a rare commodity. Rev. Reg. No. 7-2001 is an offer all qualified taxpayers should not refuse.

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