The Supreme Court (SC) has declared illegal and has “put an end” to “a disturbing trend of tax audits or investigations” of taxpayers by revenue officers who are not specifically named or authorized to do so.
It said that tax audits or investigations can only be done by revenue officers who are authorized under a letter of authority (LOA) issued by the commissioner of the Bureau of Internal Revenue (BIR) or his or her duly authorized representatives.
Without a LOA which is mandated by the National Internal Revenue Code (NIRC) and by the BIR rules, the audit or investigation by a revenue officer “violates the taxpayer’s right to due process; usurps the statutory power of the CIR (commissioner of internal revenue); and does not comply with existing BIR rules and regulations…,” the SC stressed.
In a decision written by Associate Justice Jhosep Y. Lopez and made public last Oct. 7, the SC said that many tax audits or investigations are done by revenue officers “under the pretext that the original revenue officer authorized to conduct the audit or investigation has been reassigned or transferred to another case or place of assignment, or has retired, resigned or otherwise removed from handling the audit or investigation.”
It pointed out that the irregular practice occurs as follows:
“A valid LOA is issued to an authorized revenue officer; the revenue officer named in the LOA is reassigned or transferred to another office, case or place of assignment, or retires, resigns, or is otherwise removed from handling the case covered by the LOA; the revenue district officer or a subordinate official issues a memorandum of assignment, referral memorandum, or such equivalent document to a new revenue officer for the continuation of the audit or investigation; and the new revenue officer continues the audit or investigation, supposedly under the authority of the previously issued LOA.”
The SC stressed that “this practice of reassigning or transferring revenue officers, who are the original authorized officers named in the LOA, and subsequently substituting or replacing them with new revenue officers who do not have a new or amended LOA issued in their name, has been the subject of several CTA (Court of Tax Appeals) decisions.”
“The Court hereby puts an end to this practice,” the SC said.
It said that under the provisions of NIRC and the Revenue Memorandum Circular No. 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.
“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. In the absence of such an authority, the assessment or examination is a nullity,” the SC said citing its previous rulings.
The SC also said:
“It is true that the service of a copy of a memorandum of assignment, referral memorandum, or such other equivalent internal BIR document may notify the taxpayer of the fact of reassignment and transfer of cases of revenue officers.
“However, notice of the fact of reassignment and transfer of cases is one thing; proof of the existence of authority to conduct an examination and assessment is another thing.
“The memorandum of assignment, referral memorandum, or any equivalent document is not a proof of the existence of authority of the substitute or replacement revenue officer. The memorandum of assignment, referral memorandum, or any equivalent document is not issued by the CIR or his duly authorized representative for the purpose of vesting upon the revenue officer authority to examine a taxpayer’s books of accounts.”
The SC decision dismissed the petition filed by the CIR against the 2018 CTA ruling which invalidated the BIR’s P16.2 million assessment of deficiency value-added tax for 2006 issued against McDonald’s Philippines Realty Corporation, 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 Aug. 31, 2007, the BIR Large Taxpayers Service issued LOA No. 00006717 Revenue Officers Eulema Demadura, Lover Loveres, Josa Gomez, and Emalyn dela Cruz to examine the books of accounts and other accounting records of McDonald’s Philippines Realty for revenue taxes from Jan. 1, 2006 to Dec. 31, 2006.
On Dec. 2, 2008, the BIR transferred the assignment of Demadura and, pursuant to Referral Memorandum No. 122-LOA-1208-00039, directed and designated Rona Marcellano to continue the audit. No new LOA was issued in the name of Marcellano and the Aug. 31, 2007 LOA was not amended or modified to include the name of Marcellano.
On Jan. 25, 2011, the CIR issued a Formal Letter of Demand (FLD) dated Jan.11, 2011 directing McDonald’s Philippines Realty to pay P17.4 million. McDonald’s Philippines 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.
McDonald’s Philippines elevated the assessment to the CTA. The tax court’s division voided the assessment on the ground that Marcellano was not authorized by way of LOA to investigate the books of accounts of the firm.
On appeal by the CIR, CTA – as a full court – affirmed the division’s ruling as it declared that “the revenue officer who conducted the audit of the respondent’s (McDonald’s) books of accounts acted without authority; the absence of an LOA issued in the name of the substitute or replacement revenue officer violated the respondent’s right to due process; and the respondent is not estopped from questioning the revenue officer’s lack of authority.”
When the CTA denied the motion to reconsider the ruling, the CIR elevated the case to the SC.
In resolving the issue, the SC also said:
“The LOA is the concrete manifestation of the grant of authority bestowed by the CIR or his authorized representatives to the revenue officers, pursuant to Sections 6, l0(c) and 13 of the NIRC. Naturally, this grant of authority is issued or bestowed upon an agent of the BIR, i.e., a revenue officer.
“Hence, petitioner is mistaken to characterize the LOA as a document ‘issued’ to the taxpayer, and that once so issued, ‘any’ revenue officer may then act pursuant to such authority.
“The petitioner wants the Court to believe that once an LOA has been issued in the names of certain revenue officers, a subordinate official of the BIR can then, through a mere memorandum of assignment, referral memorandum, or such equivalent document, rotate the work assignments of revenue officers who may then act under the general authority of a validly issued LOA.
“But a LOA is not a general authority to any revenue officer. It is a special authority granted to a particular revenue officer. The practice of reassigning or transferring revenue officers, who are the original authorized officers named in the LOA, and subsequently substituting them with new revenue officers who do not have a separate LOA issued in their name, is in effect a usurpation of the statutory power of the CIR or his duly authorized representative.
“WHEREFORE, the Petition for Review on Certiorari is DENIED for lack of merit. The Decision dated January 4, 2018 and the Resolution dated September 21, 2018 of the Court of Tax Appeals En Banc in CTA EB No. 1535, which affirmed the CTA Division’s Decision dated June 1, 2016 and the Resolution dated October 3, 2016 in CTA Case No. 8655, invalidating the P16,229,506.83 assessment of deficiency value-added tax for calendar year 2006 against the respondent, are AFFIRMED. SO ORDERED.”