FAN without PAN: A violation of due process?

In the words of my esteemed professor and Court of Appeals Justice Japar Dimaampao, the existence of the government depending on the collection of revenue must, as an object of primary importance, be insured. With this objective in mind, promptness in collection is always desirable, if not imperative. Much of the enormous task of generating adequate revenues to defray the expenses of the government has been placed upon the Bureau of Internal Revenue (BIR) with the use of the remedies of assessment and collection of national internal-revenue taxes.

The 1997 Tax Code, in relation to Sections 3.1.1 and 3.1.2 of Revenue Regulations (RR) 12-99, establishes the procedures which the government must follow in the assessment of taxes. Accordingly, the BIR is required to issue a notice of informal conference based on the revenue officer’s report of investigation. If the taxpayer fails to respond within 15 days, the case shall then be endorsed for appropriate review and issuance of deficiency taxes, if warranted.

If it is determined after review and evaluation that there exists sufficient basis to assess the taxpayer for any deficiency tax or taxes, the BIR shall issue to the taxpayer, at least by registered mail, a preliminary assessment notice (PAN) for the proposed assessment, showing in detail the facts and the law, rules and regulations or jurisprudence on which the proposed assessment is based. If the taxpayer fails to respond within 15 days from date of receipt of the PAN, or if his response is without merit, a final assessment notice (FAN) shall be issued, calling for payment of the taxpayer’s deficiency tax liability, inclusive of the applicable penalties. The taxpayer must protest the FAN by filing a request for reconsideration or reinvestigation within 30 days, otherwise, the assessment shall become final.

In many cases when the assessment period is about to prescribe, the 15-day period within which the taxpayer may respond to the PAN is not strictly observed by the BIR. Even before the lapse of this period, the BIR finalizes the PAN and issues the FAN against the taxpayer. This practice has been commonly raised as an issue by taxpayers as a violation of their right to due process.

Previously, the Court of Tax Appeals (CTA) in Caltex Phils. Inc. v. CIR (October 4, 2000) held that there was a violation of the petitioner’s procedural due process when the BIR issued the assessment despite the lack of prior notice for an informal conference and the PAN. In its more recent decisions, however, it declared that the failure of the BIR to issue the PAN cannot be considered a violation of the taxpayer’s right to due process.

According to the CTA, a taxpayer is not obligated to protest a PAN since failure to do so will not result in the finality of the assessment. What the law demands is the issuance of a FAN which should be formally protested to by the taxpayer, otherwise, the assessment shall become final and executory. In considering the notice to the taxpayer of the legal and factual bases of the assessment issued as substantial compliance with the mandate of Section 228 of the Tax Code, the CTA held that so long as the parties are given the opportunity to explain their side, the requirements of due process are satisfactorily complied with.

Clearly, it is the difference in the effect of the failure to respond to the PAN and the FAN which became the basis of the CTA pronouncement. Does this mean that the PAN may be dispensed with in the assessment process?

As sound a basis as it seems, let it be stressed that the issuance of the PAN is a mandate that is expressly contained in the Tax Code and RR 12-99, which may only be dispensed with under the cases provided under Section 228 of the Code. At any rate, in view of the recent CTA decisions, a timely protest to the FAN must be filed by the taxpayer. Otherwise, the assessment shall become final and serve as basis for the collection of the tax so assessed.

The taxpayer must be given an opportunity to air his side. As held by the Supreme Court, “One of the most basic and fundamental precepts of laws enshrined in the Constitution is that no person shall be deprived of his property without due process of law. The persuasiveness of the right to due process reaches our both substantive and procedural rights, regardless of their source, be it the Constitution or only a statute or a rule of court.”

Described as unlimited, plenary, comprehensive and supreme, the power to tax is indeed considered the strongest of all the powers of the government. The assessment of taxes must, however, be exercised within the ambit of the law and its implementing rules and regulations.  

The author is an associate of BDB Law. If you have any comments or questions concerning the article, you can e-mail the author at jeanross.l.abenasa@bdblaw.com.ph or call 856-2952.

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