Many of us have been following the impeachment drama unfolding in the Senate and watching how the Vice President defends herself against the accusations brought against her. Whatever your views may be on the allegations, the situation reminds us of a basic reality that defending oneself from accusations is not an easy exercise. The defendant must answer the allegations, present evidence, challenge the accusations, and go through the technical procedures prescribed by law. It can be a long, difficult, and costly process. As the Vice President herself declared, there will be a ‘bloodbath.’ Well, that is how the legal system works.
The same is true in tax practice. When a taxpayer receives a tax assessment from the tax authorities, particularly the Bureau of Internal Revenue (BIR), the Bureau of Customs (BOC) or from the local government units (LGUs), and believes that the assessment is erroneous or without factual or legal basis, the taxpayer is given ample opportunity to defend its case. It may file a protest, submit documents, explain the facts, and present the legal basis for its disagreement with the assessment.
Ideally, the controversy should end at the administrative level. The taxpayer and the tax authority may be able to resolve their differences through discussions, clarification of facts, or a proper appreciation of the applicable tax laws and regulations. But not every tax dispute can be resolved administratively. When the taxpayer and the tax authority remain divided on the issues, the taxpayer may eventually have no choice but to bring the case before the courts. But that is easier said than done. The process is a difficult exercise.
And that is where the long road to defending a tax assessment truly begins. Tax cases can take years to resolve. Going to court is costly. The taxpayer must pay filing fees, which are non-refundable even if the taxpayer eventually wins the case. There are also professional fees and other expenses related to preparing and presenting the case. Pleadings must be prepared and filed within prescribed periods. Documents and other evidence must be gathered and presented. Legal and factual arguments must be developed and supported. The taxpayer must respond to the position of the tax authority and comply with the procedural requirements of the court.
For a taxpayer facing a substantial assessment, this can be a significant burden. Even if the taxpayer may have sufficient basis under the law to argue that the assessment is wrong and that it has strong legal and factual position to support its case, having a good case is only one thing; proving it in court is another. And there are technical rules it has to undertake to prove its case before the courts. There are jurisdictional requirements, periods to observe, rules on evidence, and procedural steps that must be carefully followed. Failure to comply with these requirements may have serious consequences, regardless of the strength of the taxpayer’s position on the substantive tax issue.
The reality is, defending a tax assessment requires more than simply knowing that your position is right. You should also know how to prove it, when to prove it, and where to prove it. This is among the reasons why taxpayers and tax authorities alike should, whenever possible, strive to resolve disputes at the administrative level. Litigation should ideally be the last resort. A tax dispute that can be fairly and properly resolved without going to court saves not only the taxpayer and the government valuable resources, but also the time and effort of the courts.
For taxpayers, there are important measures that can be undertaken to mitigate the risk of tax exposure and the risk of going through the long route of defending a potential tax case before the courts. A taxpayer may undergo a tax health check to review its tax compliance, identify and correct errors that may have been unwittingly committed, and address any oversights before they become the subject of a tax assessment. Where there are no clear legal precedents on a particular issue, seeking a ruling or clarification from the appropriate government office is a good measure. For multinational companies and conglomerates that engage in related-party transactions, a proper transfer pricing study is likewise essential to ensure that their transactions are properly supported and compliant with the applicable rules.
It is often better to seek the assistance of tax professionals and consultants in addressing these matters as measures to mitigate tax risk. Realities dictate that cost of obtaining professional advice and conducting a preventive tax review may prove far less than the cost of defending a tax assessment in court. Sometimes, the price of proving that we are right is simply the price we have to pay for justice.
Reviewing one’s tax affairs, addressing potential issues, and obtaining proper advice can save taxpayers from the long, costly, and bumpy road of defending a tax case before the courts. And for all of us taxpayers including government officials, certainly, transparency in all transactions is a good measure to avoid accusations of wrongdoings.
The author is a partner of Du-Baladad and Associates Law Offices (BDB Law) (www.bdblaw.com.ph).
The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal, or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported, therefore, by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at rodel.unciano@bdblaw.com.ph or call 8403-2001 local 380.