In the Philippine taxation system, the Bureau of Internal Revenue (BIR) is empowered by law to enter into a compromise settlement with taxpayers. This mechanism serves as a remedial measure for taxpayers who find themselves burdened by heavy penalties and interest, or who genuinely dispute the assessment's validity.
Under Section 204 of the National Internal Revenue Code (NIRC), as amended, the Commissioner of Internal Revenue has the authority to compromise the payment of any internal revenue tax under specific, legally defined conditions.
Legal Grounds for Compromise
A taxpayer cannot simply request a compromise because they find the tax high. The application must be anchored on one of the two exclusive grounds provided by law:
1. Doubtful Validity of the Assessment
This applies when a reasonable doubt exists as to the validity of the claim against the taxpayer. This usually occurs when:
- The assessment is based on a clear error of law or fact.
- The assessment is arbitrary or lacks factual basis.
- The taxpayer’s case is supported by existing jurisprudence or BIR rulings.
2. Financial Incapacity
This applies when the taxpayer’s financial position demonstrates a clear inability to pay the assessed tax. Specific instances include:
- The taxpayer is declared insolvent or bankrupt.
- The taxpayer is suffering from a surplus deficit resulting in an impairment of net worth.
- The taxpayer has ceased operations or is in the process of liquidation.
Minimum Compromise Rates
A compromise settlement is not a total waiver of the tax due. The law prescribes minimum rates based on the basic assessed tax (excluding interest and penalties):
| Ground for Compromise | Minimum Settlement Rate |
|---|---|
| Doubtful Validity | 40% of the basic tax assessed |
| Financial Incapacity | 10% of the basic tax assessed |
Note: If the taxpayer offers a rate lower than the prescribed minimums, the application requires the approval of the National Evaluation Board (NEB) or the Regional Evaluation Board (REB), depending on the amount involved.
Cases That Cannot Be Compromised
Not all tax cases are eligible for settlement. The following are generally excluded:
- Withholding tax cases (as the taxpayer is merely a trustee for the government).
- Criminal violations already filed in court.
- Cases where the assessment has become final and executory (unless financial incapacity is proven).
- Estate tax cases (in certain conditions).
- Cases involving fraud.
The Application Process: Step-by-Step
The process of applying for a compromise settlement is rigorous and involves multiple levels of review within the Bureau.
Step 1: Filing of Application
The taxpayer must submit BIR Form No. 2107 (Application for Abatement or Cancellation of Tax, Penalties, and/or Interest) to the Revenue District Office (RDO) or the Large Taxpayers Service (LTS) where they are registered.
Step 2: Submission of Supporting Documents
The "burden of proof" lies with the taxpayer. Required documents typically include:
- A formal letter of offer stating the grounds and the amount offered.
- Copy of the Final Assessment Notice (FAN) or Formal Letter of Demand (FLD).
- For Doubtful Validity: Legal briefs, citations of law, or evidence of factual errors.
- For Financial Incapacity: Audited Financial Statements (AFS) for the last three years, proof of bankruptcy, or certificates of no property holdings.
Step 3: Evaluation by the BIR
The application is reviewed by the Technical Working Group of the RDO/LTS.
- Regional Evaluation Board (REB): Approves cases where the basic tax is $P500,000$ or less.
- National Evaluation Board (NEB): Composed of the Commissioner and Deputy Commissioners; they must approve cases where the basic tax exceeds $P500,000$ or where the offer is less than the prescribed minimum rates.
Step 4: Payment of the Compromise Amount
Once the application is "initially" accepted, the taxpayer is usually required to pay the offered amount immediately. However, this payment is subject to the final approval of the Board. If disapproved, the payment is credited against the total tax liability.
Step 5: Issuance of Certificate of Availment
Upon approval by the Commissioner or the relevant Board, a Certificate of Availment or a Notice of Approval is issued. This effectively closes the tax case.
Jurisdictional Thresholds for Approval
The authority to approve compromise offers is divided as follows:
- Commissioner of Internal Revenue: Has the primary power but delegates much of it to the boards.
- National Evaluation Board (NEB): Handles "large" cases, typically where the basic tax is above $P1,000,000$, or cases involving "net worth" issues.
- Regional Evaluation Board (REB): Handles cases within the region where the basic tax is $P1,000,000$ or less (or $P500,000$ depending on current administrative thresholds).
Important Considerations
- Finality: A compromise settlement, once approved and paid, is considered a "perfected contract." Neither the BIR nor the taxpayer can reopen the case unless there is proof of fraud or suppression of facts.
- Interest and Penalties: A successful compromise of the basic tax usually results in the automatic cancellation of the corresponding civil penalties and interest.
- Timing: It is best to apply for a compromise before the BIR initiates collection remedies like Distraint and Levy (seizure of property). Once properties are seized, the leverage for a compromise significantly decreases.