To compromise or to abate?
SUITS THE C-SUITE By Betheena C. Dizon
First Published in Business World (06/16/2014)
IT IS a common belief that there is no longer any remedy once a deficiency tax assessment by the Bureau of Internal Revenue (BIR) has been rendered final for failure to appeal the disputed assessment or for some other reason — that the taxpayer is left with no choice but to pay the assessed taxes. However, the truth is the taxpayer is not entirely helpless because the Tax Code provides for two possible remedies: compromise or abatement.
The two terms can be confused easily with each other, but compromise and abatement are different remedies that are applicable to different scenarios. To help taxpayers distinguish one remedy from the other, Section 204 of the Tax Code provides that paying any internal revenue tax may be compromised when there is reasonable doubt in the validity of the claim against the taxpayer, or the financial incapacity of the taxpayer demonstrates a clear inability to pay the assessed tax.
In this regard, the Bureau of Internal Revenue (BIR) recently issued Revenue Memorandum Circular No. 34-2014, dated April 1, providing clarification on the requirement of “doubtful validity” of assessment. The BIR emphasized that an assessment based on the “Best Evidence Obtainable Rule” shall not be automatically considered as a doubtful assessment, and that the surrounding circumstances resulting in the issuance of the assessment must also be considered.
Section 204 also sets the minimum compromise rates. For inability to pay the assessed tax, the minimum compromise rate is equivalent to 10% of the basic tax assessed, while for other cases, it is 40% of the basic tax assessed.
On the other hand, the same provision states that abatement or cancelation of tax liability may be made when the tax or any portion thereof appears to be unjustly or excessively assessed or the administration and collection costs involved do not justify the collection of the amount due.
It is clear from the Tax Code provisions that compromise will involve the payment of an amount prescribed by law and regulations; while abatement means there will be no payment involved, as it ultimately cancels out any liability.
While the Tax Code provides only for two grounds to compromise a tax liability, Revenue Regulations No. 30-2002, as amended provide for specific instances when it can be said that there is doubtful validity in the tax assessment or financial incapacity on the part of the taxpayer. These instances, while numerous, are rather specific in nature and must be clearly proven by the taxpayer. Furthermore, it is now required that the taxpayer first pay the compromise offer upon the filing of the application, and no application for compromise shall be processed without the full settlement of the offered amount.
As a rule, only the Commissioner of Internal Revenue has the power to compromise or abate taxes. However, compromise offers involving basic taxes of P500,000 or less are subject to the approval of the BIR Regional Evaluation Board. Where the basic tax involved exceeds P1 million, or where the settlement is less than the prescribed minimum rates, approval shall be made by the National Evaluation Board. Where the compromise offer is not approved by the Commissioner of Internal Revenue, it is imperative that the officers who accepted and approved the compromise offers are only those who are expressly authorized to do so. In the absence of proof that the compromise offer was approved and accepted by officers who are authorized by the Commissioner, the same can be disregarded [Security Bank Corp. vs. Commissioner of Internal Revenue (G.R. No. 130838, promulgated Aug. 22, 2006)].
The same, however, is not the case for abatement of a tax liability. Revenue Regulations No. 13-2001 expressly provide that the Commissioner of Internal Revenue has the sole authority to abate taxes, penalties, or interest. Unlike compromise offers, such authority has not been delegated by pertinent regulations. This authority is generally applicable to surcharge and compromise penalties only. However, in meritorious instances, the Commissioner may likewise abate the interest as well as basic tax assessed.
Based on these regulations, it goes without saying that the approval of any compromise and abatement is within the judgment and discretion of the Commissioner of Internal Revenue, or any other authorized officer, as the case may be. In fact, the CTA held in the case of Licomcen, Inc. vs. Guillermo T. Parayno, et al. [CTA EB Case No. 424, promulgated April 24, 2009] that a taxpayer cannot anticipate that its application for abatement will be approved by its mere filing as the authority of the Commissioner of Internal Revenue to abate tax liability involves the exercise of discretion, and therefore, its outcome would depend entirely on the Commissioner’s own judgment.
While these remedies are available to taxpayers who may seem to be already caught in a bind with respect to their tax liabilities, the burden clearly is on the taxpayer to convince the Commissioner that a compromise or abatement is in order. For instance, as one of the grounds for compromise is the existence of reasonable doubt on the validity of the assessment, the taxpayer must be able to propound evidence and strong legal arguments to cast reasonable doubt on the correctness of the assessment. This is particularly true in light of the principle that tax assessments are presumed to have been valid when issued.
Indeed, Section 204 of the Tax Code, and its related implementing regulations and issuances, does not confer a right to be entitled to said remedies. And as the BIR expectedly has to act upon these offers of compromise and abatement with extreme caution, approvals are seldom heard of. For one, this can be attributed to the fact that the grounds for compromise or abatement are very specific, and failure to qualify under any of those cases would automatically warrant a denial of the application.
While the Tax Code provides for such “last ditch” remedies, it must be kept in mind that this is subject to the underlying rule that the concerned taxpayer must be able to prove sufficiently that the compromise or abatement recourse meets the qualifications and complies with the stringent requirements under applicable laws and regulations. Failure to do so will leave the taxpayer with no choice but to fulfill his or her tax obligations.
Betheena C. Dizon is a tax associate director of SGV & Co.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.