BRAVO NOTES on TAXATION 1 1 Rachel Ann Katrina P.

Abad 3D AY2011-2012
CHAPTER 6: TAX REMEDIES-REMEDIES OF THE GOVERNMENT such appeal does not suspend the payment, levy, distraint and/or sale of any of the taxpayers property for the satisfaction of his tax liability. However, when in the opinion of the court of tax appeals the collection of the tax may jeopardize the interest of the government and/or the taxpayer, the court at any stage of the proceedings may suspend or restrain the collection of the tax and requires the tax payer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the court.

IMPORTANCE OF TAX REMEDIES It exist to enhance the governments tax collection efforts, they too, come in as safeguards against arbitrary action. While taxes are the lifeblood of the government and should be collected without unnecessary hindrance, such collection must nevertheless be made in accordance with law as any arbitrariness will negate the very reason for the government itself. The government in order to ensure tax collection, may adopt or prescribe coercive measures as in a case where the payment of a local tax is made as a condition to the registration and transfer of motor vehicles or as in the case of capital gains tax on the sale, exchange or other disposition by individuals of real property which are capital assets [ section 56 (A)(3), 1996 NIRC ]

Q: suppose the BIR during the pendency of the appeal in the court of tax appeals, files a civil action in the regional trial court for the collection of the tax liability, what is the remedy of the tax payer? A: the taxpayer may file a motion in the RTC for the dismissal of the case on the ground that there is no basis for the collecting of the tax where the assessment thereof is still under dispute in the court of tax appeals.

COLLECTIBILITY OF TAX AS COLLECTION ENFORCEMENT

BASIS

FOR

RULE ON NO INJUCTION TO RESTRAIN TAX COLLECTION Injunction collection will not lie to restrain tax

When the unpaid tax is a tax due per return as in the case of a self-assessed income under the pay-as-you-file system, the collection may be instituted without need of any assessment. [ section 228, 1997 NIRC] NOTE: the basic consideration: whether the assessment is final and unappealable, or the decision of the commissioner is final, executor and demandable, is whether the BIR has legal basis to collect the tax liability either by distraint and levy or by civil action.

Section 218 of the 1997 NIRC: no court shall have the authority to grant injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by this Code.

Q: what is the justification for this rule? A: GENERAL RULE: It is upon taxation that the government chiefly relies to obtain the means to carry on its operations and it is of the utmost importance that the means adopted to enforce the collection of taxes levied should be summary and interfered with as little as possible.

EXCEPTION: when the decision of the commissioner on a tax protest is appealed to the court of tax appeals pursuant to section 11 of R.A. 1125 in relation to section 228 of the 1997 NIRC,

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REMEDIES OF THE GOVERNMENT 1. 2. 3. 4. 5. 6. 7. Tax lien Compromise Distraint and levy Civil action Criminal action Forfeiture Suspension of business violation of the VAT law operations for COMPROMISES 1. Compromise Re payment of internal revenue taxes Value added tax of importation of goods [ section 107 (B), 1997 NIRC] Constructive importation A similar kind also exists in the case of articles imported into the country free from excise tax by tax exempt persons whereby a similar tax lien on the articles exists until the tax thereon is paid. [ section 131 (A), 1997 NIRC]

8.

Enforcement of administrative fines Remedies of distraint and levy as well as collection by civil and criminal actions may, in the discretion of the commissioner, be pursued singly or independently of each other, or all of them simultaneously The remedies of distraint and levy shall not be availed of where the amount of the tax involved is not more than Php100.00. the judgment in the criminal case shall not only impose the penalty but shall also order the payment of the taxes subject of the criminal case as finally decided by the commissioner.

Authority of the commissioner to compromise, abate and refund or credit taxes [ section 204 (A), 1997 NIRC] Note: in this case, the taxpayers offer to compromise shall not be considered unless and until he waives in writing his privilege under R.A. 1405 or under other general or special laws, and such waiver shall constitute the authority of the commissioner to inquire into his bank deposits

2.

Compromise distinguished from abatement Cases in which abatement is authorized: [ section 204 (B), 1997 NIRC] Compromise: involves a reduction of the taxpayers liability Abatement: the entire tax liability of the taxpayer is cancelled.

TAX LIENS 1. Delinquency lien:

Nature and extent of tax lien. [ section 219, 1997 NIRC]

Q: when does the lien of the government for unpaid internal revenue taxes arises? A: the tax lien attached not only from the service of the warrant of distraint of personal property but from the time the tax became due and payable.

3.

Compromise of criminal violations All criminal violations compromised except: a. b. may be

Those already filed in court Those involving fraud

2. Lien under the VAT law:

GENERAL RULE: the taxpayers criminal liability arising from his violation of the pertinent provision of the code may be settled extra-judicially instead of the

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BIR instituting against the taxpayers criminal action in court. A compromise in extra-judicial settlement of the taxpayers criminal liability for his violation is consensual in character, hence, may not be imposed on the taxpayer without his consent. BIR may only suggest settlement of the taxpayers liability through a compromise The extra-judicial settlement of the taxpayers criminal liability and the amount of the suggested compromise penalty shall conform with the schedule of compromise penalty shall conform with the schedule of compromise penalties provided under the relevant BIR regulations or orders. It implies mutual agreement. It cannot be imposed in the absence of a showing that the taxpayer consented thereto. If the commissioners offer of compromise is rejected by the taxpayer, the commissioner cannot enforce it but he may file a criminal action against the taxpayer for the tax violation. GENERAL RULE: The commissioner has no power to impose and collect the so called compromise penalties in the absence of a compromise agreement validly entered into between the taxpayer and the commissioner. Being voluntary in character, they may be collected only if the taxpayer is willing to pay. EXCEPTION: where in an appeal to CTA, the taxpayer has expressed his willingness to pay compromise penalties; said amounts may be collected as part of the judgment.

4.

Delegation of the power to compromise GENERAL RULE: [ section 204, 1997 NIRC] EXCEPTION: [ section 7 (C), 1997 NIRC] If the taxpayer fails to abide by the compromise arrangement, the government could either insist on the collection of the compromised sum, or disregard the compromise and collect the original due.

Q: suppose the taxpayer reneges on his conformity to the payment of the suggested compromise, may the commissioner collect the compromise penalty thru an action in court by distraint and levy? A: a collection action does not lie because a compromise penalty is neither a tax nor an administrative penalty for tax delinquency.

5.

Power to compromise not absolute COLLECTION BY DISTRAINT AND LEVY Q: may a case still be compromised even after final judgment? A: NO. As a mere agent of the government, the commissioner of customs is not authorized to accept nothing less than what is adjudicated in favour of the government. By virtue of such final judgment, the government had already acquired a vested right. a. It runs parallel in point of importance to the remedies of collection by civil and criminal actions. Known as summary, extra-judicial administrative enforcement remedies. or

Distinction between distraint and levy [ section 205 (a), 1997 NIRC] Note: the levy may be made before, simultaneously with, or after the distraint of personal property belonging to the delinquent taxpayer.

6.

Nature of compromise penalty It is a certain amount of money which the taxpayer pays to compromise a tax violation. This is paid prosecution. in lieu of a criminal b.

Actual v. Constructive distraint

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Actual distraint: resorted to when delinquency in the payment sets in. (when at the time required for payment, a person fails to pay his tax obligation) -it consists of the actual seizure and distraint of the personal property of the taxpayer, such as goods, chattels, effects, stocks, etc. in sufficient quantity to satisfy the tax or charge, together with any increment thereto incident to delinquency, the expenses of the distraint and the cost of the subsequent sale. 2. Service of warrant of distraint [Section 208, 1997 NIRC]

3.

Notice of sale of distraint property [Section 209 (1st par.), 1997 NIRC]

4.

Sale of property distrained [Section 209 (2nd par. and 4th par.), 1997 NIRC]

Constructive distraint: one where no actual delinquency is necessary before the same is resorted to. In the following instances, the remedy of constructive distraint may be availed of: 1. The taxpayer is retiring business subject to tax from any

5.

Release of distrained property upon payment prior to sale [Section 210, 1997 NIRC]

2. 3. 4.

He intends to leave the Philippines He removes his property therefrom He performs any act tending to obstruct the proceedings for collecting the tax due or which may be due inform him [ section 206, 1997 NIRC]

6.

Purchase by government at sale upon distraint [Section 212, 1997 NIRC]

Relate: failure to surrender property placed under distraint and levy [section 277, 1997 NIRC]

Note: it can be applied even if actual tax delinquency on the part of the taxpayer already exists.

(ii)

Constructive distraint procedure [Section 206 (2nd and 3rd par., 1997 NIRC]

It is a preventive remedy the aim of which is to forestall a possible dissipation of the taxpayers assets when delinquency takes place.

(iii)

Penalty for selling, transferring, encumbering or in any way disposing of property placed under constructive distraint [Section 276, 1997 NIRC]

c.

Procedures followed in actual and constructive distraint (i) Actual distraint procedure 1. Commencement proceedings of distraint (iv) Preferential liens

[Section 207 (A), 1997 NIRC]

Preferential liens of employees for unpaid wages under article 110 of the Labor code apply only to bankruptcy cases where the employer is under liquidation due to bankruptcy.

BRAVO NOTES on TAXATION 1 5 Rachel Ann Katrina P. Abad 3D AY2011-2012

Refer to article 2241 and 2247 of the NCC. (the government has a preferential lien over the employees) 1. When a tax is assessed and the assessment becomes final and unappealable because the taxpayer fails to file an administrative protest with the BIR within 30 days from receipt of the assessment [ section 228, 1997 NIRC] When an administrative protest filed by the taxpayer against the assessment is denied, in whole or in part, is not acted upon within 180 days from submission of documents, and the taxpayer adversely affected by the decision or inaction fails to file an appeal with the court of appeals within 30 days from the receipt of said decision, or from lapse of the 180day period. (ibid.)

d.

Procedure on levy of real property 1. Service of warrant of levy [Section 207 (B) (1st to 3rd par.), 1997 NIRC]

2.

2.

Advertisement of the sale [Section 213 (1st par.), 1997 NIRC]

3.

Public sale of the property under levy [Section 213 (1st to 2nd par.), 1997 NIRC]

A civil action may also be filed in order to collect the so called self-assessed tax which is computed by the taxpayer himself and reflected in his return under the pay-as-youfile system. It should be noted that no civil or criminal action for the recovery of taxes shall be filed in court without the approval of the commissioner Regional directors may also approve the filing of civil actions for tax collection if this power is expressly delegated to them by the commissioner under appropriate memorandum orders on that matter Civil actions for collection are filed in the regular courts GENERAL RULE: complaints in civil actions for the collection of delinquent taxes are required to be approved by the Solicitor general before they are filed. EXCEPTION: BIR legal officers deputized as special attorneys and stationed outside Metro Manila may file verified complaints without the approval of the Solicitor General subject to the following requirements: a. The SG should be furnished a copy of the complaint SG will file a notice of appearance in the court where the action is filed. If the complaint is found to be improperly filed, a motion to

4.

Redemption of property sold [Section 214 (1st par.), 1997 NIRC]

5.

Forfeiture to the government for want of bidder [Section 215, 1997 NIRC]

6.

Further distraint and levy [Section 217, 1997 NIRC] Note: rationale on the rule on further distraint and levy: if a full discharge of the liability is to be the result of the distraint and levy, this would permit a clever taxpayer who is able to conceal most of the valuable part of his property from the revenue officers to escape payment of his tax liability by sacrificing an insignificant portion of his holdings.

CIVIL ACTION Resorted to when a tax liability becomes collectible. Collectability of tax arises in the following instance:

b.

c.

BRAVO NOTES on TAXATION 1 6 Rachel Ann Katrina P. Abad 3D AY2011-2012

dismiss is likewise filed with the court action to collect the tax assessed is filed but the government in court, this is akin to an action to enforce a judgment such that no inquiry can be made thereon as to the merits of the original case or the justness of the judgment relied upon.

Form and Mode of proceeding in actions arising under NIRC: [ section 220, 1997 NIRC]

COLLECTION IN CASES WHERE THE ASSESSMENT IS FINAL AND UNAPPEALABLE The request for reconsideration cannot be considered as a protest against the assessment. The failure to substantiate ones claim against the assessment due to the non-submission of their position paper justified the commissioners action in collecting the tax in the settlement proceedings Taxpayers failure to dispute the assessment effectively by complying with the conditions laid down by the BIR, such as specifying under oath the grounds of his protest, paying one-half of the amount assessed and putting up a bond for the balance provided a legal basis for the government to collect the taxpayers liability by ordinary civil action Apart from failing to seasonably file the required estate tax returns, petitioner failed to question the assessment served on them, thereby allowing said assessments to lapse into finality. Said deficiency tax assessments having become final, executor and demandable, the same may already be collected by summary remedy of distraint and levy,

Q: suppose there is a pending protest or a request for reinvestigation in the BIR, id the commissioner required to rule first on such pending request before he can go to court for the purpose of collecting the tax assessed? A: not necessary. The legislative policy is to give the commissioner much latitude in the speedy and prompt collection of taxes because it is on taxation that the government depends to obtain the means to carry on its operations. When the commissioner did not reply to the tax payers request for reconsideration and instead referred the case to the SG for judicial collection, this was indicative of his decision against reinvestigation.

The important thing to consider: should the commissioner decide to collect the tax assessed without first deciding the taxpayers protest or request for reinvestigation and/or reconsideration, the effect is that the commissioners action is a decision of denial in which event the taxpayer may file an appeal with the CTA pursuant to the provisions of sec.11 of R.A. 1125. The filing of a civil action in court to collect a tax which was the subject matter of appending protest in the BIR was a justifiable basis for the taxpayer to appeal to the CTA and to move for a dismissal in the trial court of the governments action to collect the tax liability under dispute.

COLLECTION CASES WHERE THE DECISION IS FINAL, EXECUTRY DEMANDABLE

BIRS AND

The taxpayers failure to appeal the commissioners decision of the CTA deprived him of the right to question the commissioners authority to collect the tax within the prescriptive period provided by law. Where a taxpayer failed to comply with a condition laid down by the commissioner for the reinvestigation of the case and its failure to appeal to the CTA made the assessment final and executor so that if an

DEFENSES PRECLUDED EXECUTORY ASSESSMENT

BY

FINAL

AND

In civil actions for the collection of taxes which have become collectible either because of the taxpayers failure to protest against the assessment or his failure to appeal the commissioners decision to the CTA, the taxpayer is precluded from interposing the following defenses:

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1. Validity or legality of the assessment: A disputed assessment for internal revenue taxes falls within the exclusive jurisdiction of the CTA to the exclusion of the ordinary courts, where a taxpayer can ventilate the defences against the assessment Once a decision of the BIR on a disputed assessment becomes final, executor and demandable for lack of an administrative protest against the assessment of his failure to appeal to the CTA within the reglementary 30 day period, defenses bearing on the legality or validity of the assessment would necessarily fall outside the jurisdiction of the regular courts. setting defense. up such

COLLECTION THRU ANSWER IN THE CTA

FILING

OF

THE

BIRS

No civil action to collect the taxpayers tax liability was filed by the government is no ground for claiming the right of the government to collect said liability had already prescribed Prescription has not set in inasmuch as the governments answer in the CTA was filed well within the prescriptive period prescribed by law The answer filed in the tax court was tantamount to the filing of a civil action for collection in the regular court. When the action for collection is filed in the regular courts prescription is tolled.

2.

Prescription of the governments right to assess Since the same should be subject of the taxpayers appeal to the CTA The right of the government to object to defenses of prescription of the governments right to assess may be waived if in an action to collect a final and executor assessment, the government litigated on the issue of prescription and submitted said issue for the resolution of the court. By its actuation, the government waived its right to object

LIABILITY OF STOCKHOLDERS FOR UNPAID TAXES OF DISSOLVED OR DEFUNCT CORPORATION [section 52 (C), 1997 NIRC] Purpose of the tax clearance in dissolving corporation: to insure payment of all tax liabilities of the corporation to the government.

Q: in the event that this requirement is not complied with prior to corporate dissolution, can the commissioner hold the stockholders of the defunct corporation liable for the unpaid taxes of the dissolved entity? A: NO. The obligations of the corporation are not those of the stockholders for it is a basic rule that a corporation is vested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related.

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EXCEPTION: it is possible for stockholders to be held liable for the unpaid tax liabilities of a defunct corporation as when the assets of the corporation have passed into the hands of its stockholders Q: in the event of a set-off during the pendency of a tax protest in the BIR, what is the remedy of the taxpayer assuming his refund claim is already a settled matter? A: the taxpayer could treat the set-off as a decision of the commissioner denying his protest in which case he could file an appeal with the CTA within the reglementary period of 30 days pursuant to section 228, 1997 NIRC.

The stockholders were the beneficiaries of the defunct corporation and as such should be held liable to pay the taxes of the corporation in proportion to their shares in the distribution of the assets of the defunct corporation

CRIMINAL ACTION (a) In general: it is authorized under section 205(b) of the 1997 NIRC. the judgment in the criminal case shall not only impose the penalty but shall also order payment of the taxes subject of the criminal case as finally decided by the commissioner

A stockholder who has unpaid subscription is liable for the debts of the corporation. Considering that the unpaid debt of the stockholder for the purchase price of the subscribed shares represents an asset of the corporation in the hands on the stockholders.

It is not resorted to as a collection remedy only. There are other cases not involving non-payment of taxes where criminal action is utilized. 1. 2. [section 221, 1997 NIRC] [section 264 (a), 1997 NIRC]

COLLECTION THRU APPLICATION OF DISPUTED TAX AGAINST A REFUNDABLE TAX

Even if a tax being collected by the commissioner is being contested by the taxpayer, the same can be enforced by a set-off or by applying it against the refundable tax that may be due the taxpayer It is assumed that both the collection and the right to be refunded of taxes have not yet prescribed and that the refund claim has already been approved. The set-off is justified because taxes must be collected inasmuch as they are the lifeblood of the government and that it is a settled principle that the government is not duty bound to resolve a pending tax protest before it can collect the unpaid tax liability Payment of taxes could be postponed by simply questioning their validity, government functions would be paralyzed. The government should not apply a tax that has prescribed against a refundable sum because it is a well settled principle in our jurisdiction that equitable recoupment is not recognized

(b) Important actions 1.

considerations

regarding

criminal

No criminal action shall be begun without the approval of the commissioner Criminal actions instituted on behalf of the government under the authority of the tax code or other laws, enforced by the BIR shall be brought in the name of the government of the Philippine and shall be conducted by the legal officers of the BIR The acquittal of the taxpayer in a criminal action does not necessarily result in the exoneration of said taxpayer from his civil liability to pay taxes

2.

3.

The civil liability to pay taxes arises not because of any felony but upon the taxpayers failure to pay taxes. Criminal liability in taxation arises as a result of ones liability to pay his taxes. The extinction of ones criminal liability does not necessarily result in the extinguishment of his civil liability to pay taxes

BRAVO NOTES on TAXATION 1 9 Rachel Ann Katrina P. Abad 3D AY2011-2012

RATIONALE: with regard to the tax proper, the state correctly points out in its brief that the acquittal in the criminal case could not operate to discharge the petitioner from the duty to pay the tax, since that duty is imposed by statute prior to and independent of any attempt on the part of the taxpayer to evade payment. The obligation to pay the tax is not a mere consequence of the felonious acts charged in the information, nor is it a mere civil liability derived from a crime that would wiped out by the judicial declaration that the criminal acts charged did not exist. When the civil action arising out of a tax delinquency is extinguished by prescription it is still possible for such tax to be collected by criminal action inasmuch as actions of this kind prescribe only after the lapse of 5 years A: NO. It is legally proper. What is involved here in the criminal action is legally not hte collection of taxes where the assessment of the commissioner of internal revenue may be reviewed by the CT but a criminal prosecution for violations of the NIRC which is within the cognizance of the RTC. There is no requirement for the precise computation and assessment of the tax before there can be a criminal prosecution.

GENERAL RULE: an assessment is not necessary before a criminal charge can be filed. The criminal charge need only be proved by a prima facie showing of failure to file a required tax return and such fact need not be proved by an assessment. CASES: (compare) 1. Ungab vs. cusi In cases where a false or fraudulent return is submitted or in cases of failure to file a return such as this case, proceedings in court may be commenced without an assessment. Civil and criminal aspects of the case may be pursued simultanaeosly Protest could not stop or suspend the criminal action which was independednt of the resolution of the protest in the CTA. The commissioner of internal revenue in such tax evasion cases, it is his discretion on whether to issue an assessment or to file a criminal case against the taxpayer or to do both.

4.

The subsequent satisfaction of the tax liability by payment or prescription will not operate to extinguish the taxpayers criminal liability. The satisfaction of the civil liability is not one of the grounds for extinction of criminal action. In a criminal action instituted against a taxpayer for the latters failure to pay income taxes, subsidiary imprisonment cannot be imposed in case of insolvency on the part of the taxpayer as regards the tax which he is sentenced to pay The law itself provides for the imposition of subsidiary imprisonment in case of non payment of fine due to the tax payers insolvency. Section 280 of 1997 NIRC speaks of subsidiary imprisonment only in cases of failure to pay the fine imposed and is silent about the taxpeyers failure to pay the taxes assessed.

5.

Q: suppose a taxpayer is assessed for taxes and assuming that against that assessment, he filed an administrative protest in the BIR. May the government, during pendancy of that protest, file a criminal action against the taxpayer for filing a false and fraudulent return? Is not the filing of the criminal action premature and precipitate?

2.

Fortune tobacco case

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Before anyone is prosecuted fro wilful attempt to evade or defeat any tax under section 253 and 255 of the tax code, the fact that a tax is due must first be proved For criminal prosecution to proceed before assessment, there must be a prima facie showing of a wilful attempt to evade taxes. taxpayer for violation of the tax code and not to demand payment 6. [section 253 (d), 1997 NIRC] Penal liability of corporations [section 256, 1997 NIRC] Note: where a corporation violates the tax law, criminal liability settles upon the corporate officer and/or employee responsible for the violation. A corporation can act only through its officers and agents and where the business itself involves a violation of the law, the correct rule is that all who participate in it are liable. As the filing of the false return constitutes a violation of the law, defendant as the author of the illegal act, must necessarily answer for its consequences provided that the allegations are proven.

Issuance of an assessment Before an assessment is issued, there is by practice, a preassessment notice sent to the taxpayer . The taxpayer is given a chance to submit position papers and document to rpove that the assessment is unwarranted. If the commissioner is unsatisfied, an assessment signed by him or her is then sent to the taxpayer informing the latter specifically and clearly that an assessment has been made against him or her. (filing a

Criminal charges complaint) -

Directly filed with the DOJ A taxpayer is notified that a criminal case has been filed against him, not that the commissioner has issued an assessment It is instituted to penalized the

BRAVO NOTES on TAXATION 1 11 Rachel Ann Katrina P. Abad 3D AY2011-2012