THE Supreme Court has branded as “disturbing trend” the tax audits or investigations of taxpayers by revenue officers without a letter of authority (LOA) issued by the commissioner of the Bureau of Internal Revenue.
Thus, the Court released to the public last October 7 a 13-page decision by the Court’s Third Division and penned by Associate Justice Jhosep Y. Lopez in the case of the Commissioner of Internal Revenue (CIR) vs McDonald’s Philippines Realty Corp. (MPRC). The Court held that the practice of reassigning or transferring revenue officers originally in the LOA and substituting them with new revenue officers to conduct the audit or investigation without a separate LOA violates the taxpayers’ right to due process in tax audit.
Likewise, the SC held that the said practice “usurps the statutory power of the BIR commissioner and does not comply with existing rules and regulations of the BIR.”
“Unless authorized by the CIR himself or by his duly authorized representative, an examination of the taxpayer cannot be undertaken. 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,” the Court declared.
Grant of authority
The court further held that “there must be a grant of authority, in the form of a LOA, before any revenue officer can conduct an examination or assessment.”
“The revenue officer so authorized must not go beyond the authority given,” the court said. “In the absence of such an authority, the assessment or examination is a nullity.”
The SC explained that issuance of an LOA prior to examination and assessment is a requirement of due process and not just a mere formality or technicality.
The Court noted that it has previously ruled that the issuance of a Letter Notice to a taxpayer was not sufficient if no corresponding LOA was issued.
It added that due process demands that after a letter of notice has been sent, the revenue officer should have properly secured an LOA before proceeding with the further examination and assessment of the taxpayer’s accounts.
“Due process requires that taxpayers must have the right to know that the revenue officers are duly authorized to conduct the examination and assessment, and this requires that the LOAs must contain the names of the authorized revenue officers,” the SC explained.
“In other words, identifying the authorized revenue officers in the LOA is a jurisdictional requirement of a valid audit or investigation by the BIR, and therefore of a valid assessment,” it added.
Argument junked
THE Court junked the argument of the CIR that the LOA is not issued to the revenue officer and that the same is issued to the taxpayer.
The SC noted that the LOA “is the concrete manifestation of the grant of authority bestowed by the CIR or his authorized representatives to the revenue officers” under Sections 6, l0(c) and 13 of the National Internal Revenue Code (Republic Act 8424 or The Tax Reform Act of 1997) or the NIRC.
This grant of authority, according to the SC, is issued upon an agent of the BIR, thus, it is wrong for the CIR to characterize the LOA as a document issue to the taxpayer, and that once so issued, “any” revenue officer may then act pursuant to such authority.
It said that under the provisions of NIRC and Revenue Memorandum Circular 43-90, only the CIR and his or her duly authorized representatives–deputy commissioners, revenue regional directors and other officials authorized by the CIR–may issue a LOA.
Assignment transferred
THE Court’s ruling stemmed from the petition filed by the CIR seeking to set aside the 2018 ruling of the Court of Tax Appeals, which invalidated the BIR’s P16.2-million assessment of deficiency value-added tax for 2006 issued against MPRC, a foreign firm which set up a local branch to purchase and lease back two McDonald’s restaurant sites for lease to McGeorge Foods Inc.
Case records showed that on August 31, 2007, the BIR Large Taxpayers Service issued an LOA to Revenue Officers Eulema Demadura, Lover Loveres, Josa Gomez and Emalyn dela Cruz to examine the books of accounts and other accounting records of MPRC for revenue taxes from January 1, 2006 to December 31, 2006.
On December 2, 2008, the BIR transferred the assignment of Demadura and directed and designated Rona Marcellano to continue the audit, pursuant to Referral Memorandum 122-LOA-1208-00039.
No new LOA was issued in the name of Marcellano. The August 31, 2007 LOA was not amended or modified to include the name of Marcellano.
However, on January 25, 2011, the CIR issued a Formal Letter of Demand (FLD) dated January 11, 2011 directing MPRC to pay P17.4 million. The company protested and pointed out it was denied due process.
On April 18, 2013, the CIR issued a Final Decision on Disputed Assessment (FDDA) for deficiency value-added tax of P16.2 million.
MPRC elevated the assessment to the CTA, which nullified the assessment on the ground that Marcellano was not authorized by way of LOA to investigate the books of accounts of the firm.
After its appeal was denied, the CIR elevated the issue before the SC.