No authority, no examination

Under Philippine taxation laws, the power of the State to collect taxes, although an inherent power, is subject to constitutional and inherent limitations. Despite taxes being the lifeblood of the government, taxation must be balanced with the taxpayer’s right to due process. Consistent with this limitation, the National Internal Revenue Code (NIRC) provides substantial and procedural requirements for the Bureau of Internal Revenue (BIR) to observe in performing tax audit and investigations.

One of the requirements imposed upon the BIR in auditing and investigating is to observe proper procedure in the issuance of a tax assessment. The initial stage in a tax assessment process is for the government to issue a Letter of Authority (LoA).

An LoA is the authority given to the appropriate revenue officer assigned to assess functions pursuant to Section 6(A) of the NIRC of 1997, as amended. On the strength of an LoA, revenue officers examine the books of account and other accounting records of taxpayers to determine the correct tax liability. Without such authority, the assessment or examination is a nullity.

The provisions of NIRC and the Revenue Memorandum Order (RMO) 43-90 state that only the Commissioner on Internal Revenue (CIR) and his or her duly authorized representatives — deputy commissioners, revenue regional directors, and other officials authorized by the CIR — may issue a LoA.

This matter was emphasized in the recent case of Commissioner of Internal Revenue

(CIR) v. McDonald’s Philippines Realty

Corp. (MPRC) (GR 242670, 10 May

2021). In this 13-page decision, the Supreme

Court labelled as a “disturbing trend” the practice of revenue officers who are not specifically named or authorized in the

LoA, yet conduct tax audits or investigations “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.”

The Court even illustrated the typical practice of revenue officers as follows: First, a valid LoA is issued to an authorized revenue officer; second, 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; third, 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 fourth, the new revenue officer continues the audit or investigation, supposedly under the authority of the previously issued LoA.”

In the case of CIR v. MPRC, the Supreme Court thereto declared an end to the illustrated practice. It was held that the practice of reassigning or transferring revenue officers originally named in the LoA and substituting or replacing them with new revenue officers to continue the audit or investigation without a separate or amended LoA: (i) Violates the taxpayer’s right to due process in a tax audit or investigation; (ii) usurps the statutory power of the CIR or his duly authorized representative to grant the power to examine the books of account of a taxpayer; and (iii) does not comply with existing BIR rules and regulations on the requirement of an LoA in the grant of authority by the CIR or his duly authorized representative to examine the taxpayer’s books of accounts.

According to the

High Court, as part of due process, the taxpayer’s right to know that the revenue officers are duly authorized to conduct the examination includes the requirement that the LoA must contain the names of the authorized revenue officers. It also emphasized that an LoA is not a general authority to any revenue officer, but a special authority granted to a particular revenue officer.

“An LoA is not a general authority to any revenue officer, but a special authority granted to a particular revenue officer.

“One of the requirements imposed upon the BIR in auditing and investigating is to observe proper procedure in the issuance of a tax assessment.