A tighter rein on BIR mission orders

The polls have concluded, reflecting what is thought to be the majority’s desire to return to a disputed version of the past. Whatever their politics, taxpayers are still hoping that our courts and democratic institutions continue to fulfill their roles as bastions of taxpayer’s rights, in the face of the overwhelming power of the state and its tax authorities.

Arguably, Oplan Kandado is one of the most potent weapons in the tax authorities’ arsenal, most easily implemented, and thereby, feared by most taxpayers, large or small. Oplan Kandado is an enforcement program of the Bureau of Internal Revenue (BIR), under which the BIR may impose administrative sanctions such as suspension and temporary business closure for non-compliance of requirements.

A business closure and suspension of operations can be financially devastating for the taxpayer. A recent incident involved one of the country’s largest real estate conglomerates, in which a mere press release from the BIR announcing a closure order was enough to send the shares of the company, which is publicly traded, on a wild roller-coaster ride. In fact, due to the impact the incident had in the capital markets, the Department of Finance (DoF) found it necessary to step in and suspend all the special audits being conducted by the Bureau, on the grounds that these orders duplicate the actions being undertaken by the appropriate BIR office.

While taxpayers may be able to heave a collective sigh of relief for now, there is always the possibility that the suspension could be lifted, or similar measures introduced at another time, under some other guise or name.

Therefore, it is still imperative to review whether the exercise of this power by the tax authorities is justified. Keep in mind that the constitutional rights of a taxpayer require that “no person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the law.” As duly held by the Supreme Court, the scales must tilt in favor of the individual, weighing the power of the state to tax and its inherent right to prosecute perceived transgressors of the law on one side and the constitutional rights of a citizen to due process of law and equal protection of the law.

Oplan Kandado is arguably based on Section 115 of the Tax Code. It empowers the Commissioner or his authorized representative to suspend the business operations and temporarily close the business of any person for the following violations: failure to issue receipts or invoices; failure to file a value-added tax return; understatement of sales or receipts by at least 30%; and failure to register the business.

However, before Oplan Kandado can be implemented, the Revenue Officers (or BIR examiner) must first secure a Mission Order. Revenue Officers are not authorized to visit the taxpayer unless sanctioned by a Mission Order issued and signed by the Regional Director pursuant to the BIR’s Tax Compliance Verification Drive (TCVD) or Tax Mapping.

Tax Mapping, in turn, was introduced to further expand the tax base and enhance tax compliance. The program allows the BIR to assign authorized examiners to visit companies and verify their compliance with current tax laws.

Under BIR regulations and the Mission Order itself, Section 6 (C) of the Tax Code is cited as the basis for the verification drive. The provision states that the Commissioner may, at any time during the taxable year, order inventory-taking of goods of any taxpayer as a basis for determining his internal revenue tax liabilities. The business operations of any person, natural or juridical, may also be placed under observation or surveillance if there is reason to believe that such person is not declaring his correct income, sales, or receipts for internal revenue tax purposes.

Therefore, a Mission Order is strictly limited to inventory-taking of goods or observation/surveillance, where there is basis to suspect tax evasion. Over and beyond such stated purposes and circumstances, the Mission Order is unauthorized and violative of the taxpayer’s constitutional rights. Any subsequent action or consequence stemming from its issuance is void and could be struck down.

As held by the courts, when the application of an administrative issuance modifies existing laws or exceeds the intended scope, the issuance becomes void not only for being ultra vires, but also for being unreasonable.

Indeed, in a recent decision of the Court of Tax Appeals, a BIR closure order against a taxpayer was nullified for non-compliance with the appropriate procedure in implementing the Oplan Kandado program. The court held that the taxpayer’s constitutional right to due process was violated with the service of a 48-hour notice and a five-day value-added tax (VAT) notice to padlock the premises. However, neither notices detailed how the alleged VAT deficiency was incurred nor computed, as required under the Tax Code, and no preliminary and final assessment notices were ever issued.

In another case, the court held that the taxpayer was not liable for deficiency excise tax and VAT as the assessment was based only on a mission order and not a letter of authority as required under the law. A mission order covers only surveillance or observation operations and not outright authority to examine the taxpayer’s financial statements. Therefore, the assessment was deemed void.

Indeed, the courts will continue to play a vital role in restraining any excessive exercise of the taxing power by the government itself. And in the performance of its duties, only a steadfast and nonpartisan judiciary can properly declare, as it has many times in the past, “For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not been observed” (G.R. No. L-28896, Feb. 17, 1988).

The views or opinions presented 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.

Jaffy Y. Azarraga is a director at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of PricewaterhouseCoopers global network.


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