A company first line of defense is the ever-so-charming concierge and the somewhat intimidating security guards. Visitors to the premises, whether they be the general public, jobseekers, clients and customers, suppliers, or let’s not forget, inspectors and other regulators, they are greeted by the reception staff. Due to the pandemic, many companies resorted to skeleton crews, but imbued the roles of front desk personnel with greater importance. Has a similar elevation of status taken place with the BIR’s tax assessment process, particularly the receipt of audit notices? Let’s find out.
In a ruling issued by the Supreme Court (SC), G.R. No 223767 dated April 24, 2023, the Chief Justice held that the taxing authority must comply with the requirements of a valid substituted service even with the existence of a central receiving station inside the taxpayer’s registered address.
MODE OF SERVICE OF ASSESSMENT NOTICES
Let us recall the modes of servicing assessment notices. RR No. 18-2013, amending RR No. 12-99, provides the valid modes of service of audit notices. First is via “Personal service” — by delivering a personal copy to the party at his registered or known address or wherever he may be found. A known address means a place other than the registered address where business activities of the party are conducted or his place of residence.
In cases where personal service is not practicable, the notice may be served by “substituted service or mail.” Substituted service can be resorted to when the party is not present at the registered or known address. The notice may be left at the taxpayer’s registered address, with his clerk or with a person having charge thereof. If the known address is a place where business activity is being conducted, the notice may be left with a clerk, or a person having charge thereof. However, if the known address is the place of residence, substituted service can be performed by leaving the copy with a person of legal age who is a resident.
Further, if no person is found at the taxpayer’s registered address or known address, the revenue officers concerned need to bring a barangay official and two disinterested witnesses to the address to personally observe and attest to such an absence. The notice will be given to the barangay official. Such facts will be contained in the bottom portion of the notice, as well as the names, official positions, and signatures of the witnesses. The same procedure must be observed when the taxpayer refuses to receive notice.
The third mode is ‘service by mail,” which is done by sending a copy of the notice by registered mail, reputable courier, or ordinary mail if the registry or reputable courier is not available in the locality of the addressee. It is also provided that service to the tax agent/practitioner, who is appointed by the taxpayer under circumstances prescribed in the pertinent regulations on accreditation of tax agents, is deemed service to the taxpayer.
THE RULING
In the SC case cited earlier, the taxpayer’s registered office address was 3F SM City Pampanga, Barangay San Jose, San Fernando, Pampanga. After going through the rigorous assessment process, a Formal Letter of Demand (FLD) with attached Details of Discrepancies and Assessment Notice (DDAN) was issued by the BIR Regional Director and supposedly received by the taxpayer. The Court stated that the BIR had failed to prove that the FLD-DDAN had been actually served and received by the taxpayer or its duly authorized representative. Upon further examination, the FLD-DDAN was received by an individual in the administrative office of SM City Pampanga.
The Chief Justice had ruled that valid service of the FLD-DDAN is a crucial part of due process in the tax assessment process, without which such an assessment may be rendered void. The pertinent rule in effect at the time of issuance was RR No. 12-99, which provides that the FLD must be sent only by registered mail or personal delivery, and the service thereof shall be actually or constructively received. For there to be personal delivery, the taxpayer or the duly authorized representative must acknowledge receipt in the duplicate copy of the letter of demand, indicating the following: (a) name; (b) signature; (c) designation and authority to act for and on behalf of the taxpayer; and (d) date of receipt thereof.
On the other hand, constructive service requires (1) leaving the notice on the premises of the taxpayer and (2) the fact of such service attested to, witnessed, and signed by at least two revenue officers other than the revenue officer who constructively served the same.
For the taxpayer, the FLD-DDAN was served upon the administrative officer of SM City Pampanga, and no attempts were made to serve the same upon the taxpayer’s address even though it was situated on the third floor accessible to the public and open for the BIR and its representatives to validly serve the same. BIR failed to comply with the two requisites of constructive service; thus, the service of the FLD-DDAN at the ground floor of the administrative office SM Pampanga was declared invalid and the assessment attached therewith is untenable.
The Court has occasionally emphasized that for a taxpayer to be liable for deficiency taxes, he must first be informed of the facts and legal basis upon which the assessment is made. Failure to do the same is tantamount to failure to observe due process.
SIMILAR CASES OF INVALID SERVICE
The case discussed earlier is not unique. Similar cases invalidating the service of assessment notices have been decided by the courts.
In one case, an assessment notice was served to an employee of a related party to the taxpayer. Since the related party is a distinct and separate entity from the taxpayer, the assessment was deemed invalid.
Another example is that the FLD was served upon a branch office of the taxpayer and received by their receptionist. The Court ruled that there was a failure to establish proper service of the FLD. The Court had discussed at length that a corporation, being a juridical person, is deemed to always be present at its address, and substituted service may only be used if personal service is impracticable. Further, the Court explained that substituted service may only be allowed to authorized representatives with actual or apparent authority. The BIR, after dealing with countless corporations and taxpayers, is aware that transactions may only be made with authorized corporate officials; mere service upon the receptionist without the prudence to locate any of the officers shall lead to the invalidity of such service.
Similarly, the Court has ruled that service by personal delivery strictly requires that the notice be served only to the taxpayer at his registered or known address or wherever he may be found. The authority of security guards to receive official notices is confined to service by registered mail. Since there are different situations and circumstances for the taxpayers, the validity of the service remains on a case-by-case basis decided by the court.
TAKEAWAY
The service of the assessment documents is often overlooked during the tedious tax audit process. These documents, including the Letter of Authority, Notice of Discrepancy, Preliminary Assessment Notice, and FLD, instill fear and unease in the minds of the taxpayers. As a matter of right, due process is always afforded to every taxpayer, and this includes the valid and proper service of the pertinent documents.
Always remember that making the wrong assumptions can always come back to haunt you. With the transition to hybrid work arrangements, you will encounter various people whose authority should not be taken at face value. This applies to the BIR, taxpayers, and the general public — “Don’t talk to strangers.”
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Kim M. Manuel is an associate from the Tax Advisory & Compliance Practice Area of P&A Grant Thornton. P&A Grant Thornton is one of the leading audit, tax, advisory, and outsourcing firms in the Philippines, with 29 Partners and more than 1000 staff members.
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