Under Section 6 of the National Internal Revenue Code (NIRC), the Commissioner or his duly authorized representative may authorize the examination of any taxpayer and the assessment of the correct amount of tax. This power is exercised through a Letter of Authority (LOA).
Section 13 of the NIRC is even more specific. It states:
“SEC. 13. Authority of a Revenue Officer.- Subject to the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, a Revenue Officer assigned to perform assessment functions in any district may, pursuant to a Letter of Authority issued by the Revenue Regional Director, examine taxpayers within the jurisdiction of the district in order to collect the correct amount of tax, or to recommend the assessment of any deficiency tax due in the same manner that the said acts could have been performed by the Revenue Regional Director himself.”
What if an audit investigation is conducted and an assessment is made pursuant to a Letter Notice (LN) instead of a Letter of Authority (LOA)? Is a Letter Notice a valid and sufficient substitute for a Letter of Authority? This issue was addressed by the Supreme Court in the case of MEDICARD PHILIPPINES, INC. vs. COMMISSIONER OF INTERNAL REVENUE (G.R. No. 222743).
MEDICARD PHILIPPINES, INC., Petitioner, – versus – COMMISSIONER OF INTERNAL REVENUE, Respondent.
G.R. No. 222743; 5 April 2017
MEDICARD filed its First, Second, and Third Quarterly VAT Returns through Electronic Filing and Payment System (EFPS) on April 20, 2006, July 25, 2006 and October 20, 2006, respectively, and its Fourth Quarterly VAT Return on January 25, 2007. Upon finding some discrepancies between MediCard’s Income Tax Returns (ITR) and VAT Returns, the CIR informed MEDICARD and issued a Letter Notice (LN) No. 122-VT-06-00-00020 dated September 20, 2007. Subsequently, the CIR issued a Preliminary Assessment Notice (PAN) against MEDICARD for deficiency VAT. A Memorandum dated December 10, 2007 was likewise issued recommending the issuance of a Formal Assessment Notice (FAN) against MEDICARD. On. January 4, 2008, MEDICARD received CIR’s FAN dated December 10, 2007 for alleged deficiency VAT for taxable year 2006 in the total amount of ₱196,614,476.69,10 inclusive of penalties.
Its protest having been denied, MEDICARD filed a petition for review before the Court of Tax Appeals. MEDICARD argued, in part, that the assessment was void for having been issued despite the absence of a Letter of Authority (LOA). Undaunted by the adverse Decisions of the Court of Tax Appeals, Division and En Banc, MEDICARD appealed to the Supreme Court via a petition for review on certiorari.
Whether the absence of a Letter of Authority renders the assessment void.
Letter of Authority (LOA)
An LOA is the authority given to the appropriate revenue officer assigned to perform assessment functions. It empowers or enables said revenue officer to examine the books of account and other accounting records of a taxpayer for the purpose of collecting the correct amount of tax. An LOA is premised on the fact that the examination of a taxpayer who has already filed his tax returns is a power that statutorily belongs only to the CIR himself or his duly authorized representatives. Section 6 of the NIRC clearly provides, thus:
“SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and Enforcement. –
(A) Examination of Return 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.”
Based on the afore-quoted provision, it is clear that unless authorized by the CIR himself or by his duly authorized representative, through an LOA, an examination of the taxpayer cannot ordinarily be undertaken. The circumstances contemplated under Section 6 where the taxpayer may be assessed through best-evidence obtainable, inventory-taking, or surveillance among others has nothing to do with the LOA. These are simply methods of examining the taxpayer in order to arrive at the correct amount of taxes. Hence, unless undertaken by the CIR himself or his duly authorized representatives, other tax agents may not validly conduct any of these kinds of examinations without prior authority.
Letter Notice Under the RELIEF System
With the advances in information and communication technology, the Bureau of Internal Revenue (BIR) promulgated RMO No. 30-2003 to lay down the policies and guidelines once its then incipient centralized Data Warehouse (DW) becomes fully operational in conjunction with its Reconciliation of Listing for Enforcement System (RELIEF System). This system can detect tax leaks by matching the data available under the BIR’s Integrated Tax System (ITS) with data gathered from third-party sources. Through the consolidation and cross-referencing of third-party information, discrepancy reports on sales and purchases can be generated to uncover under declared income and over claimed purchases of Goods and services.
RMO No. 30-2003 was supplemented by RMO No. 42-2003, which laid down the “no-contact-audit approach” in the CIR’s exercise of its ·power to authorize any examination of taxpayer and the assessment of the correct amount of tax. The no-contact-audit approach includes the process of computerized matching of sales and purchases data contained in the Schedules of Sales and Domestic Purchases and Schedule of Importation submitted by VAT taxpayers under the RELIEF System pursuant to RR No. 7-95, as amended by RR Nos. 13-97, 7-99 and 8-2002. This may also include the matching of data from other information or returns filed by the taxpayers with the BIR such as Alphalist of Payees subject to Final or Creditable Withholding Taxes.
Under this policy, even without conducting a detailed examination of taxpayer’s books and records, if the computerized/manual matching of sales and purchases/expenses appears to reveal discrepancies, the same shall be communicated to the concerned taxpayer through the issuance of LN. The LN shall serve as a discrepancy notice to taxpayer similar to a Notice for Informal Conference to the concerned taxpayer. Thus, under the RELIEF System, a revenue officer may begin an examination of the taxpayer even prior to the issuance of an LN or even in the absence of an LOA with the aid of a computerized/manual matching of taxpayers’: documents/records. Accordingly, under the RELIEF System, the presumption that the tax returns are in accordance with law and are presumed correct since these are filed under the penalty of perjury are easily rebutted and the taxpayer becomes instantly burdened to explain a purported discrepancy.
Letter of Authority (LOA) and the RELIEF System
Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are silent on the statutory requirement of an LOA before any investigation or examination of the taxpayer may be conducted. As provided in the RMO No. 42-2003, the LN is merely similar to a Notice for Informal Conference. However, for a Notice of Informal Conference, which generally precedes the issuance of an assessment notice to be valid, the same presupposes that the revenue officer who issued the same is properly authorized in the first place.
Conversion of LN to LOA
With this apparent lacuna in the RMOs, in November 2005, RMO No. 30-2003, as supplemented by RMO No. 42-2003, was amended by RMO No. 32-2005 to fine tune existing procedures in handling assessments against taxpayers’· issued LNs by reconciling various revenue issuances which conflict with the NIRC. Among the objectives in the issuance of RMO No. 32-2005 is to prescribe procedure in the resolution of LN discrepancies, conversion of LNs to LOAs and assessment and collection of deficiency taxes.
The Policies and Guidelines provide, among others, as quoted below:I
“V. POLICIES AND GUIDELINES
x x x x
8. In the event a taxpayer who has been issued an LN refutes the discrepancy shown in the LN, the concerned taxpayer will be given an opportunity to reconcile its records with those of the BIR within
One Hundred and Twenty (120) days from the date of the issuance of the LN. However, the subject taxpayer shall no longer be entitled to the abatement of interest and penalties after the lapse of the sixty (60)-day period from the LN issuance.
9. In case the above discrepancies remained unresolved at the end of the One Hundred and Twenty (120)-day period, the revenue officer (RO) assigned to handle the LN shall recommend the issuance of [LOA) to replace the LN. The head of the concerned investigating office shall submit a summary list of LNs for conversion to LAs (using the herein prescribed format in Annex “E” hereof) to the OACIR-LTS I ORD for the preparation of the corresponding LAs with the notation “This LA cancels LN_________ No. “
The Assessment against MEDICARD
In this case, there is no dispute that no LOA was issued prior to the issuance of a PAN and FAN against MEDICARD. Therefore no LOA was also served on MEDICARD. The LN that was issued earlier was also not converted into an LOA contrary to RMO No. 32-2005. Surprisingly, the CIR did not even dispute the applicability of RMO 32-2005 in the case which is clear and unequivocal on the necessity of an LOA for the· assessment proceeding to be valid. Hence, the CTA’s disregard of MEDICARD’s right to due process warrant the reversal of the assailed decision and resolution.
Effect of Absence of LOA
In the case of Commissioner of Internal Revenue v. Sony Philippines, Inc. (G.R. No. 178697), the Court said:
“Clearly, there must be a grant of authority before any revenue officer can conduct an examination or assessment. Equally important is that the revenue officer so authorized must not go beyond the authority given. In the absence of such an authority, the assessment or examination is a nullity. “
Purpose of LN
The Court cannot convert the LN into the LOA required under the law even if the same was issued by the CIR himself. Under RR No. 12-2002, LN is issued to a person found to have underreported sales/receipts per data generated under the RELIEF system. Upon receipt of the LN, a taxpayer may avail of the BIR’s Voluntary Assessment and Abatement Program. If a taxpayer fails or refuses to avail of the said program, the BIR may avail of administrative and criminal .remedies, particularly closure, criminal action, or audit and investigation. Since the law specifically requires an LOA and RMO No. 32-2005 requires the conversion of the previously issued LN to an LOA, the absence thereof cannot be simply swept under the rug, as the CIR would have it. In fact Revenue Memorandum Circular No. 40-2003 considers an LN as a notice of audit or investigation only for the purpose of disqualifying the taxpayer from amending his returns.
Distinctions between LN and LOA
The Supreme Court laid down the crucial differences between a Letter of Authority and a Letter Notice as follows:
First, an LOA addressed to a revenue officer is specifically required under the NIRC before an examination of a taxpayer may be had while an LN is not found in the NIRC and is only for the purpose of notifying the taxpayer that a discrepancy is found based on the BIR’s RELIEF System.
Second, an LOA is valid only for 30 days from date of issue while an LN has no such limitation.
Third, an LOA gives the revenue officer only a period of 10 days from receipt of LOA to conduct his examination of the taxpayer whereas an LN does not contain such a limitation.
Simply put, LN is entirely different and serves a different purpose than an LOA. Due process demands, as recognized under RMO No. 32-2005, that after an LN has served its purpose, the revenue officer should have properly secured an LOA before proceeding with the further examination and assessment of the petitioner. Unfortunately, this was not done in this case.
Indispensability of LOA
Contrary to the ruling of the CTA en banc, an LOA cannot be dispensed with just because none of the financial books or records being physically kept by MEDICARD was examined. To begin with, Section 6 of the NIRC requires an authority from the CIR or from his duly authorized representatives before an examination “of a taxpayer” may be made. The requirement of authorization is therefore not dependent on whether the taxpayer may be required to physically open his books and financial records but only on whether a taxpayer is being subject to examination.
The BIR’s RELIEF System has admittedly made the BIR’s assessment and collection efforts much easier and faster. The ease by which the BIR’s revenue generating objectives is achieved is no excuse however for its non-compliance with the statutory requirement under Section 6 and with its own administrative issuance. In fact, apart from being a statutory requirement, an LOA is equally needed even under the BIR’s RELIEF System because the rationale of requirement is the same whether or not the CIR conducts a physical examination of the taxpayer’s records: to prevent undue harassment of a taxpayer and level the playing field between the government’ s vast resources for tax assessment, collection and enforcement, on one hand, and the solitary taxpayer’s dual need to prosecute its business while at the same time responding to the BIR exercise of its statutory powers. The balance between these is achieved by ensuring that any examination of the taxpayer by the BIR’ s revenue officers is properly authorized in the first place by those to whom the discretion to exercise the power of examination is given by the statute.
That the BIR officials were not shown to have acted unreasonably is beside the point because the issue of their lack of authority was only brought up during the trial of the case. What is crucial is whether the proceedings that led to the issuance of VAT deficiency assessment against MEDICARD had the prior approval and authorization from the CIR or her duly authorized representatives. Not having authority to examine MEDICARD in the first place, the assessment issued by the CIR is inescapably void.
Hence, the absence of a Letter of Authority (LOA) renders the subject assessment void.