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BDB Laws Tax Law For Business appears in the opinion section of BusinessMirror every

Thursday. BDB Law is an affiliate of Punongbayan & Araullo (P&A).

Presumption resting on another presumption

The Bureau of Internal Revenue (BIR) hopes to effectively utilize the Third Party
Information Matching Program (the Program) because it is a no-contact
assessment that would negate perceived corruption in tax assessments. In the
said Program, the buyer of a company's products is matched against another
companys reported sales. If there are discrepancies, the BIR issues a Letter
Notice (LN) to verify any tax deficiencies. Revenue Memorandum Circular (RMC)
No. 40-03 provides that an LN being served by the BIR to a taxpayer who is
found to have under-declared its sales or purchases through the Program can be
considered a notice of audit or investigation. This should not be the case.
An LN merely serves as a notice to a taxpayer that it will be subjected to audit or
investigation with specific reference to the result of information obtained from
third party sources. It cannot give rise to an assessment without the BIR first
conducting an audit or investigation.
This is affirmed by Revenue Memorandum Order (RMO) No. 42-03 issued by the
BIR itself. It is expressly provided in the said RMO that an LN shall serve as a
discrepancy notice to the taxpayer, similar to a Notice of Informal Conference.
Thus, the procedures defined in Revenue Regulation (RR) No. 12-99 should
likewise be observed. RMO No. 42-03 further requires that the concerned
taxpayer be given an opportunity to reconcile the discrepancy.
RMO No. 46-04 further provides that in the event a taxpayer who has been
issued an LN protests the accuracy of the data provided by third party sources,
the revenue officer, upon receipt of the protest letter, should evaluate the protest
letter and require not only the taxpayer to execute a Sworn Statement on the
data it has provided, but also the third party source with respect to the data it
presented. Moreover, the Regional Director/Head of the Large Taxpayers
Service should decide on the most appropriate enforcement action (such as

audit, investigation, surveillance and/or stock-taking) that will expedite the

recovery of the unpaid taxes.
Strict compliance with RMO No. 46-04 was recently affirmed by the Court of Tax
Appeals (CTA) in Fort Bonifacio Development Corporation v CIR, CTA Case No.
7531, February 4, 2009. In this case, the CTA cancelled the assessment for
failure of the BIR to present certifications/sworn statements from the third party
source. The information used to make the assessment was deemed unconfirmed
and the assessment based merely on presumptions.
This is supported by the very basic tenets of due process. Under the Tax Code,
the BIR is required to first notify the taxpayer of its findings, which should be
based on facts and not on presumptions. The certifications/sworn statements
guarantee that the taxpayer is informed in writing of the true facts on which the
assessment is based, and that the BIR has confirmed its proposed assessment
with its third party source. Thus, in comparing the purchases of one taxpayer
from the sales of another, the BIR must make sure that it is making an accurate
With this recent decision by the CTA, it only affirms that our courts will not
condone and promote irresponsibility and laxity on the part of the BIR in
observing the procedures prescribed by law and existing internal rules, especially
when a taxpayers right to due process is already being violated. The BIR should
be mindful not to issue baseless and unconfirmed LNs.
An assessment must be based on actual facts. It should not be based on a mere
presumption or assumption, regardless of how reasonable or logical said
presumption may be. The Supreme Court has elucidated that in order to stand
the test of judicial scrutiny, the assessment must be based on actual facts. If the
correctness of an assessment is mere presumption, it cannot be made to rest on
another conjecture.