You’ve Got (e)Mail: Tax assessments in a pandemic

Since the COVID-19 pandemic started wreaking havoc over a year ago, government and private organizations have implemented flexible work arrangements allowing employees to work remotely. Working from home during a lockdown helped ensure employee safety and minimize the impact of government restrictions on business operations.

However, this off-site work setup has its challenges in transactional communications. The Bureau of Internal Revenue (BIR) slashed its 2020 revenue goal twice due to the expected slowdown in the collection of deficiency taxes and difficulty in conducting tax audits, in part because of the communication hurdles between the BIR and the taxpayers posed by the alternative work arrangements.

With the BIR tasked this year to collect a staggering P2.1 trillion in support of the country’s continuing fight against COVID-19, taxpayers should expect more aggressive BIR efforts on tax assessments. As the pandemic is far from ending soon and with off-site work arrangements eventually adopted as a semi-permanent recourse, it is important to ensure that the needed taxes are collected while guaranteeing that taxpayers’ rights are observed and respected.

An indispensable step of a tax audit is the serving of assessment notices to the taxpayer. The courts have consistently ruled that the proper service of assessment notices is an integral part of due process. A service with any infirmities may lead to an invalid tax assessment. It makes sense because it is the notice that apprises a taxpayer of the matters relating to the tax audit. Thus, the service must be to the appropriate persons.

Last year, the BIR issued Revenue Memorandum Circular 110-2020, detailing the proper service of an electronic Letter of Authority (eLA), which evidences the revenue officers’ authority to conduct an examination of the taxpayer’s tax and accounting records. The circular clarified that the modes of service for assessment notices under Revenue Regulations No. 18-2013 — the Preliminary Assessment Notice (PAN), Formal Letter of Demand (FLD)/Final Assessment Notice (FAN), and Final Decision on Disputed Assessment (FDDA) — shall also apply to the service of an eLA.

Given the current work-from-home arrangements implemented by companies, security guards and receptionists are often the only company personnel physically reporting for work. Notwithstanding, taxpayers must keep in mind the permissible modes of service for the tax investigation to be valid.

Under the foregoing regulations, the eLA and assessment notices may be served either through 1) personal service; 2) substituted service; or 3) service by mail.

As a rule, personal service is the preferred mode of service. Substituted service and service by mail can be resorted to by the BIR in case personal service is not practicable. For taxpayers with appointed tax agents/practitioners, the service to these persons shall be deemed service to the taxpayer.

It is generally assumed that proper service is done by the BIR. However, if the taxpayer denies receipt of the eLA and/or assessment notices, the burden of proof shifts to the BIR. The courts have been consistent in ruling that the BIR should prove that the person who received the notices have the authority to do so.

With the prevalent shift to alternative work arrangements, there may be instances where the persons receiving the BIR assessment notices do not have the proper appreciation of the delivered documents to file a timely reply to the BIR. Given this, it may be time to push for a digital or virtual mode of conducting tax assessments to adapt to the changing environment.

As early as 2000, Republic Act (RA) 8792 or the Electronic Commerce Act allows government offices to accept/use electronic data messages, electronic documents, and electronic signatures. Technically speaking, the BIR may adopt an electronic mode of service for assessments and its other processes. Conversely, taxpayers should also be allowed to respond to these assessments electronically. Last year, the BIR released a circular accepting the withdrawal of protest letters to the FAN and FDDA via electronic mail.

However, apart from RA 8792, it appears that the use of digital transmission in tax assessments remains limited. Although the regulations allow for different modes of service, delivery of assessment notices is still only through physical means, i.e., through the delivery of hard copies of documents to the authorized representative/s of the taxpayer. Moreover, current revenue regulations have yet to formally enable taxpayers to correspond with the tax authorities electronically. In a 2019 case, the Court of Tax Appeals (CTA), sitting En Banc, invalidated a tax assessment because the FAN was issued to the taxpayer via e-mail, a mode of service not sanctioned by any rules or regulations.

With the rapid shift in business model and work norms to adapt to the pandemic, it may finally be apt for the BIR to revisit its rules and consider online platforms for tax assessments. This measure may be done, for example, by allowing the service of the eLA and assessment notices through the taxpayers’ registered e-mail address as a valid mode of service. After all, taxpayers are required to register in the Electronic Filing and Payment System (eFPS) facility for transmitting digital tax returns. It is also beneficial for both parties if replies to assessment notices and supporting documents are uploaded to a secure site that only the concerned BIR and the taxpayers can access. Uploaded files also allow easier access to documents for the parties involved, instead of relying on a singular hard copy of the documents submitted.

Although digitalization will likely pose financial and regulatory challenges to the BIR, Finance Secretary Carlos G. Dominguez III early this year expressed confidence that the BIR will exceed its collection targets for 2021, given the organization’s aggressive digital transformation.

With tax assessments being one of the top revenue-generating sources of the government, shifting from paper-based to virtual processes may be one of BIR’s value-adding opportunities worth investing in today.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only and should not be used as a substitute for specific advice.

Kathrine Joy S. Capales is a manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

+63 (2) 845-2728

kathrine.joy.capales@pwc.com

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