d. Compromise and Abatement of Taxes

Leave of Court Required

It is possible, at any stage of litigation before final judgment, to compromise taxes, provided there is leave of court. (Pampanga Sugar Development Company v. Court of Industrial Relations, G.R. No. L-13178, 25 March 1961)¹

Compromise cannot be entered into after final judgment.

Compromise on the ground of doubtful validity cannot be entered into after final judgment.

Reason: By virtue of such final judgment, the Government had already acquired a vested right; a tax liability made final and executory by court judgment cannot be compromised on the ground of doubtful validity of the assessment. (Rovero v. RAFAEL AMPARO as Judge of the Court of First Instance of Manila, G.R. No. L-5482, 5 May 1952)²

Instances when the CIR may compromise taxes

• Doubtful validity of the assessment; and
• Financial incapacity. (NIRC, Sec. 204)³

Instances Constituting Doubtful Validity

Compromise may be entered into when it is shown that:

• The delinquent account or disputed assessment is one resulting from a jeopardy assessment;
• The assessment seems to be arbitrary in nature, appearing to be based on presumptions and there is reason to believe that it is lacking in legal and/or factual basis;
• The taxpayer failed to file an administrative protest on account of the alleged failure to receive notice of assessment and there is reason to believe that the assessment is lacking in legal and/or factual basis;
• The taxpayer failed to file a request for reinvestigation/reconsideration within 30 days from receipt of the FAN and there is reason to believe that the assessment is lacking in legal and/or factual basis;
• The taxpayer failed to elevate to the CTA an adverse decision of the CIR, or his authorized representative, within 30 days from receipt thereof and there is reason to believe that the assessment is lacking in legal and/or factual basis;
• The assessments were issued on or after January 1, 1998, where the demand notice allegedly failed to comply with the formalities prescribed under Sec. 228 of the NIRC⁴;
• Assessments made based on the "Best Evidence Obtainable Rule" and there is reason to believe that the same can be disputed by sufficient and competent evidence;
• An assessment based on “Best Evidence Obtainable Rule” should not be automatically considered as a doubtful assessment. The surrounding circumstances that led to the issuance of such assessment must be thoroughly evaluated. (R.M.C. No. 34-14)⁵
• The assessment was issued within the prescriptive period for assessment as extended by the taxpayer's execution of Waiver of the Statute of Limitations the validity or authenticity of which is being questioned or at issue and there is strong reason to believe and evidence to prove that it is not authentic; and
• The assessment is based on an issue where a court of competent jurisdiction made an adverse decision against the BIR, but for which the Supreme Court has not decided upon with finality. (added by RR No. 08-04⁶)

Instances Constituting Financial Incapacity

Compromise may be entered into when it is shown that:

• The corporation ceased operation or is already dissolved (however, the tax liabilities for the assets distributed to the stockholders as return of capital cannot be compromised);
• Taxpayer has a surplus deficit resulting to capital impairment by at least 50%;
• Taxpayer is suffering from a net worth deficit (for corporations);
• The taxpayer is a compensation income earner and he has no more leviable assets except his family home; or
• The taxpayer has been declared by any competent tribunal, authority, body, or government agency as bankrupt or insolvent. (R.R. No. 30-2002, Sec. 4)⁷

Additional Notes: Grounds for Compromise

The CIR shall not consider any offer for compromise settlement on the ground of financial incapacity of a taxpayer with Tax Credit Certificate (TCC), on hand or in transit, or with pending claim for tax refund or tax credit with the BIR, or with existing finalized agreement or prospect of future agreement with any party that resulted or could result to an increase in the equity of the taxpayer at the time of the offer for compromise or at a definite future time.

Moreover, no offer of compromise shall be entertained unless and until the taxpayer waives in writing his privilege of the secrecy of bank deposits under RA 1405⁸ or under other general or special laws, and such waiver shall constitute as the authority of the CIR to inquire into the bank deposits of the taxpayer.

Taxpayers seeking a compromise settlement of unsettled tax obligations must now pay the compromise offer upfront before their applications are processed. No application for compromise settlement shall be processed without the full settlement of the offered amount. (R.R. No. 09-13)⁹

Cases Which may be Compromised

• Delinquent accounts;
• Cases under administrative protest after issuance of the FAN to the taxpayer which are still pending in the Regional Offices, Revenue District Offices, Legal Service, Large Taxpayer Service (LTS), Collection Service, Enforcement Service and other offices in the National Office;
• Civil tax cases being disputed before the courts;
• Collection cases filed in courts; and
• Criminal violations, other than those already filed in court or those involving tax fraud. (R.R. No. 30-02)¹⁰

Cases that may NOT be Subject of Compromise

• Withholding tax cases, unless the applicant-taxpayer invokes provisions of law that cast doubt on the taxpayer's obligation to withhold;
• Criminal tax fraud cases confirmed as such by CIR or his duly authorized representative;
• Criminal violations already filed in court;
• Delinquent accounts with duly approved schedule of installment payments;
• Cases where final reports of reinvestigation or reconsideration have been issued resulting to reduction in the original assessment and the taxpayer is agreeable to such decision by signing the required agreement form for the purpose; other protested cases shall be handled by the Regional Evaluation Board (REB) or the National Evaluation Board (NEB) on a case to case basis;
• Cases which become final and executory after final judgment of a court, where compromise is requested on the ground of doubtful validity of the assessment; and
• Estate tax cases where compromise is requested on the ground of financial incapacity of the taxpayer. (R.R. No. 30-02)¹¹

Abatement

Abatement (NIRC, Sec. 204 B¹²)

the diminution or decrease in the amount of tax imposed,” such that to abate is “to nullify or reduce in value or amount.” “In abatement or cancellation, no mutual concessions between the taxpayer and the CIR are made.” (People v. Sandiganbayan, G.R. No. 152532, 16 August 2005)¹³

Coverage of Abatement

General Rule: Surcharge and compromise penalties only

Exception: In meritorious instances, the CIR may abate the interest as well as basic tax assessed, provided, however, that cases for abatement, cancellation of tax, penalties, and/or interest by the CIR shall be coursed through certain officials (R.R. No. 13-01, Sec. 4)¹⁴

Grounds for Abatement

• The tax or any portion thereof appears to be unjustly or excessively assessed; or
• The administration and collection costs involved do not justify the collection of the amount due. (NIRC, Sec. 204[B]¹⁵)

Instances Where there Exists an Unjust or Excessive Assessment: (R.R. No. 13-01, Sec. 2¹⁶)

• Filing of the return/payment was made at the wrong venue;
• Taxpayer’s mistake in payment of tax was due to erroneous written advice of a revenue officer;
• Taxpayer’s non-compliance is due to a difficult interpretation of a law;
• Failure to pay on time due to substantial losses from prolonged labor disputes, force majeure and legitimate business reverses;\
• Failure to pay because of circumstances beyond the taxpayer’s control;
• Late payment of tax under meritorious circumstances such as: (R.R. No. 04-12¹⁷)
• Use of wrong tax form but correct amount of tax was remitted;
• Filing an amended return under meritorious circumstances, provided, however, that abatement shall cover only the penalties and not the interest;
• Surcharge erroneously imposed;
• Late filing of return due to unresolved issue on classification/valuation of real property (for capital gains tax cases, etc.);
• Offsetting of taxes of the same kind, i.e., overpayment in one quarter/month is offset against underpayment in another quarter/month;
• Automatic offsetting of overpayment of one kind of withholding tax against the underpayment in another kind;
• Late remittance of withholding tax on compensation of expatriates for services rendered in the Philippines pending the issuance by the Securities and Exchange Commission of the license to the Philippine branch office or subsidiary, provided, however, that the abatement shall only cover the surcharge and the compromise penalty and not the interest;
• Wrong use of Tax Credit Certificate (TCC) where Tax Debit Memo (TDM) was not properly applied for; and
• Such other instances which the Commissioner may deem analogous to the enumeration above.
• Note: In items 4 and 5 above, abatement will only cover the surcharge and compromise penalty, and not the interest.

Instances When the Administration and Collection Costs are More Than the Amount Sought to be Collected

• Abatement of penalties on assessment confirmed by lower court but appealed by the taxpayer to a higher court;
• Abatement of penalties on withholding tax assessment under meritorious circumstances;
• Abatement of penalties on delayed installment payment under meritorious circumstances;
• Abatement of penalties on assessment reduced after reinvestigation but taxpayer is still contesting reduced assessment; and
• Such other instances which the CIR may deem analogous to the above. (R.R. No. 13-01, Sec. 3)¹⁸