COMPROMISE

Compromise is a contract whereby the parties, by reciprocal concessions, avoid

litigation or put an end to one already commenced. It implies the mutual agreement by
the parties in regard to the thing or subject matter which is to be compromised.

Compromises are generally allowed and enforceable when the subject matter thereof is
not prohibited from being compromised and the person entering such compromise is
duly authorized to do so.

Persons allowed to enter into compromise of tax obligations

The law allows the following persons to do compromise in behalf of the government:

1. BIR Commissioner, as expressly authorized by the NIRC, and subject to the

following conditions:
1. When a reasonable doubt as to validity of the
claim against the taxpayer exists; or
2. The financial position of the taxpayer
demonstrates a clear inability to pay the assessed
tax (Sec. 204[A], NIRC).

2. Collector of Customs, with respect to customs duties limited to cases where the
legitimate authority is specifically granted such as in the remission of duties (Sec.
709, TCC).

3. Customs Commissioner, subject to the approval of the Secretary of Finance, in

cases involving the imposition of fines, surcharges, and forfeitures (Sec. 2316, TCC).

Compromise
In case of tax assessment, compromise is the contract between the government and
the taxpayer to setlle the liability.

Court cannot compel the CIR to compromise in cases when such is allowed, in order to
assure that no improper compromise is made to the prejudice of the Government.

NOTE: Compromise as amount of paid by the taxpayer to settle his tax liability is
different from compromise penalty which is the amount paid by the taxpayer to
compromise tax violation and paid in lieu of criminal prosecution. (Refer to Additions
to Tax.)
Requisites for Compromise
1. Tax liability of the taxpayer;
2. An offer of the taxpayer of an amount to be paid by
him; and
3. The acceptance (the CIR or the taxpayer) of the offer
in the settlement of the claim

Authority of the CIR to compromise taxes

The CIR may compromise the payment of any internal revenue tax, when:
1. A reasonable doubt as to the validity of the claim against the taxpayer exists
provided that the minimum compromise entered into is equivalent to 40% of the
basic tax (Doubtful Validity);
2. The financial position of the taxpayer demonstrates a clear inability to pay the
assessed tax provided that the minimum compromise entered into is equivalent
to 10% of the basic assessed tax (Financial Incapacity),

Minimum compromise rate

1. Based on doubtful validity = 40% of the basic assessed tax.
2. Based on financial incapability = 10% of the basic assessed tax.

Note
Where the basic tax involved exceeds P1M or where the settlement offered is less than
the prescribed minimum rates, the compromise shall be subject to the approval of the
National Evaluation Board (NEB). In other words, compromise settlement lower than
the minimum amount prescribed above may be entered subject to the approval of
NEB.

Offers of compromise of assessments issued by the Regional Offices involving basic

deficiency taxes of P500,000 or less and for minor criminal violations discovered by
the Regional and District Offices, shall be subject to the approval by the Regional
Evaluation Board (REB). However, if the offer of compromise is less than the
prescribed rates, the same shall always be subject to the approval of the NEB (RR No.
30-2002).

Financial Incapacity
The offer for compromise based on financial incapacity may be accepted upon showing
that:

1. The taxpayer is a Compensation income earner with no other source of income and
the family’s gross monthly compensation income does not exceed the levels of
compensation income provided for Sec. 4.1.1. of Revenue Regulations 30-2002 and it
appears that the taxpayer possesses no other leviable/distrainable assets, other than
his family home
NOTE: Sec. 4.1.1 of RR 30-2002: “If taxpayer is an individual whose only source of
income is from employment and whose monthly salary, if single, is P10,500 or less, or
if married, whose salary together with his spouse is P21,000 per month, or less, and it
appears that the taxpayer possesses no other leviable/distrainable assets, other than
his family home”

2. The taxpayer has been declared by any competent tribunal/authority/body/

government agency as Bankrupt or insolvent.

3. The corporation ceased operation or is already Dissolved;

Provided, that tax liabilities corresponding to the Subscription Receivable or
Assets distributed/distributable to the stockholders representing return of
capital at the time of cessation of operation or dissolution cannot be
compromised.

4. The taxpayer, as reflected in its latest Balance Sheet supposed to be filed with
the Bureau of Internal Revenue, is suffering from surplus or earnings deficit
resulting to Impairment in the original capital by at least 50%;

That amounts payable or due to stockholders other than business-related

transactions which are properly includible in the regular “accounts payable” are
by fiction of law considered as part of capital and not liability, and that the
taxpayer has no sufficient liquid asset to satisfy the tax liability

5. The taxpayer is suffering from a Net worth deficit (total liabilities exceed total
assets) computed by deducting total liabilities (net of deferred credits and
amounts payable to stockholders/owners reflected as liabilities, except
business related transactions) from total assets (net of pre-paid expenses,
deferred charges, pre-operating expenses, as well as appraisal increases in fixed
assets,) taken from the latest audited financial statements,
In the case of an individual taxpayer, he has no other leviable properties under
the law other than his family home.

Requisites for financial incapacity as ground for compromise settlement

1. Clear inability to pay the tax; and
2. The taxpayer must waive in writing his privilege of
the secrecy of bank deposit under RA 1405 or other general or special laws,
which shall constitute as the CIR’s authority to inquire into said bank deposits
(Sec. 6 [F], NIRC).
Grounds for denial of compromise settlement based on financial incapacity
1. If the taxpayer has a Tax Credit Certificate, issued under the NIRC, or If the
taxpayer has a pending claim for tax refund or tax credit with the BIR,
Department of Finance One- Stop-Shop Tax Credit and Duty Drawback Center
(Tax Revenue Group or Investment Incentive Group) and/or the courts, or

2. If the taxpayer has an existing finalized agreement or prospect of future

agreement with any party that resulted or could result to an increase in the
equity of the taxpayer at the time of the offer for compromise or at a definite
future time, or

3. If the taxpayer failed to execute a waiver of his privilege of the secrecy of bank
deposits under Republic Act No. 1405 or under other general or special laws
(R.R. 30-2002).

Distinguish Compromise from Abatement

Compromise Abatement
Nature nvolves a reduction of Involves the cancellation of the entire
the taxpayer’s tax liability of a taxpayer.
liability through a
mutual agreement.

Authorized CIR, REB, NEB CIR

Officer

Grounds 1. Reasonable 1.The tax or any portion thereof

doubt as to the appears to be unjustly or excessively
validity of assessed; or
assessment; 2.The administration and collection
2. Financial costs involved do not justify the
incapacity of collection of the amount due.
the taxpayer