September 6, 1999

REVENUE REGULATIONS NO. 12-99

SUBJECT : Implementing the Provisions of the National Internal Revenue Code of

1997 Governing the Rules on Assessment of National Internal
Revenue Taxes, Civil Penalties and Interest and the Extra-Judicial
Settlement of a Taxpayer's Criminal Violation of the Code Through
Payment of a Suggested Compromise Penalty

TO : All Internal Revenue Officers and Others Concerned

SECTION 1. Scope. — Pursuant to the provisions of Section 244, in
relation to Section 245 of the National Internal Revenue Code of 1997, these
Regulations are hereby promulgated to implement the provisions of
Sections 6, 7, 204, 228, 247, 248 and 249 on assessment of national internal
revenue taxes, fees and charges and to provide the rules governing the
extra-judicial settlement of a taxpayer's criminal violation of the said Code or
any of its implementing Regulations through payment of a suggested
compromise penalty.
SECTION 2. General Principles. —
2.1 The surcharge and/or interest herein prescribed shall apply to all taxes,
fees and charges imposed under the Code which shall be collected at
the same time, in the same manner, and as part of the tax. cdasia

2.2 In case the tax due from the taxpayer is paid on a partial or installment
basis, the interest on the de ciency tax or on the delinquency tax
liability of the taxpayer shall be imposed from due date of the tax until
full payment thereof. The interest shall be computed based on the
diminishing balance of the tax, inclusive of interests.
SECTION 3. Due Process Requirement in the Issuance of a De ciency
Tax Assessment. —
3.1 Mode of procedures in the issuance of a de ciency tax
assessment:
3.1.1 Notice for informal conference. — The Revenue O cer who
audited the taxpayer's records shall, among others, state in his report
whether or not the taxpayer agrees with his ndings that the taxpayer is
liable for de ciency tax or taxes. If the taxpayer is not amenable, based on
the said O cer's submitted report of investigation, the taxpayer shall be
informed, in writing, by the Revenue District O ce or by the Special
Investigation Division, as the case may be (in the case Revenue Regional
O ces) or by the Chief of Division concerned (in the case of the BIR
National O ce) of the discrepancy or discrepancies in the taxpayer's
payment of his internal revenue taxes, for the purpose of "Informal
Conference," in order to afford the taxpayer with an opportunity to present
his side of the case. If the taxpayer fails to respond within fteen (15) days
from date of receipt of the notice for informal conference, he shall be
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 considered in default, in which case, the Revenue District O cer or the Chief
of the Special Investigation Division of the Revenue Regional O ce, or the
Chief of Division in the National O ce, as the case may be, shall endorse the
case with the least possible delay to the Assessment Division of the
Revenue Regional O ce or to the Commissioner or his duly authorized
representative, as the case may be, for appropriate review and issuance of a
deficiency tax assessment, if warranted.
3.1.2 Preliminary Assessment Notice (PAN) . — If after review and
evaluation by the Assessment Division or by the Commissioner or his duly
authorized representative, as the case may be, it is determined that there
exists su cient basis to assess the taxpayer for any de ciency tax or taxes,
the said O ce 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 (see illustration
in ANNEX A hereof). If the taxpayer fails to respond within fteen (15) days
from date of receipt of the PAN, he shall be considered in default, in which
case, a formal letter of demand and assessment notice shall be caused to
be issued by the said O ce, calling for payment of the taxpayer's de ciency
tax liability, inclusive of the applicable penalties.
LibLex

3.1.3 Exceptions to Prior Notice of the Assessment. — The notice for

informal conference and the preliminary assessment notice shall not be
required in any of the following cases, in which case, issuance of the formal
assessment notice for the payment of the taxpayer's de ciency tax liability
shall be sufficient:
(i) When the nding for any de ciency tax is the result of mathematical error
in the computation of the tax appearing on the face of the tax return
filed by the taxpayer; or
(ii) When a discrepancy has been determined between the tax withheld and
the amount actually remitted by the withholding agent; or
(iii) When a taxpayer who opted to claim a refund or tax credit of excess
creditable withholding tax for a taxable period was determined to
have carried over and automatically applied the same amount claimed
against the estimated tax liabilities for the taxable quarter or quarters
of the succeeding taxable year; or
(iv) When the excise tax due on excisable articles has not been paid; or
(v) When an article locally purchased or imported by an exempt person, such
as, but not limited to, vehicles, capital equipment, machineries and
spare parts, has been sold, traded or transferred to non-exempt
persons.
3.1.4 Formal Letter of Demand and Assessment Notice. — The formal
letter of demand and assessment notice shall be issued by the
Commissioner or his duly authorized representative. The letter of demand
calling for payment of the taxpayer's de ciency tax or taxes shall state the
facts, the law, rules and regulations, or jurisprudence on which the
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 assessment is based, otherwise, the formal letter of demand and
assessment notice shall be void (see illustration in ANNEX B hereof). The
same shall be sent to the taxpayer only by registered mail or by personal
delivery. If sent by personal delivery, the taxpayer or his duly authorized
representative shall acknowledge receipt thereof in the duplicate copy of
the letter of demand, showing the following: (a) His name; (b) signature; (c)
designation and authority to act for and in behalf of the taxpayer, if
acknowledged received by a person other than the taxpayer himself; and (d)
date of receipt thereof.
3.1.5 Disputed Assessment. — The taxpayer or his duly authorized
representative may protest administratively against the aforesaid formal
letter of demand and assessment notice within thirty (30) days from date of
receipt thereof. If there are several issues involved in the formal letter of
demand and assessment notice but the taxpayer only disputes or protests
against the validity of some of the issues raised, the taxpayer shall be
required to pay the de ciency tax or taxes attributable to the undisputed
issues, in which case, a collection letter shall be issued to the taxpayer
calling for payment of the said de ciency tax, inclusive of the applicable
surcharge and/or interest. No action shall be taken on the taxpayer's
disputed issues until the taxpayer has paid the de ciency tax or taxes
attributable to the said undisputed issues. The prescriptive period for
assessment or collection of the tax or taxes attributable to the disputed
issues shall be suspended. llcd

The taxpayer shall state the facts, the applicable law, rules and
regulations, or jurisprudence on which his protest is based, otherwise, his
protest shall be considered void and without force and effect. If there are
several issues involved in the disputed assessment and the taxpayer fails to
state the facts, the applicable law, rules and regulations, or jurisprudence in
support of his protest against some of the several issues on which the
assessment is based, the same shall be considered undisputed issue or
issues, in which case, the taxpayer shall be required to pay the
corresponding deficiency tax or taxes attributable thereto.
The taxpayer shall submit the required documents in support of his
protest within sixty (60) days from date of ling of his letter of protest,
otherwise, the assessment shall become nal, executory and demandable.
The phrase "submit the required documents" includes submission or
presentation of the pertinent documents for scrutiny and evaluation by the
Revenue O cer conducting the audit. The said Revenue O cer shall state
this fact in his report of investigation.
If the taxpayer fails to le a valid protest against the formal letter of
demand and assessment notice within thirty (30) days from date of receipt
thereof, the assessment shall become final, executory and demandable.
If the protest is denied, in whole or in part, by the Commissioner, the
taxpayer may appeal to the Court of Tax Appeals within thirty (30) days from
date of receipt of the said decision, otherwise, the assessment shall
become final, executory and demandable.
In general, if the protest is denied, in whole or in part, by the
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 Commissioner or his duly authorized representative, the taxpayer may
appeal to the Court of Tax Appeals within thirty (30) days from date of
receipt of the said decision, otherwise, the assessment shall become nal,
executory and demandable: Provided, however, that if the taxpayer elevates
his protest to the Commissioner within thirty (30) days from date of receipt
of the nal decision of the Commissioner's duly authorized representative,
the latter's decision shall not be considered nal, executory and
demandable, in which case, the protest shall be decided by the
Commissioner. cdtai

If the Commissioner or his duly authorized representative fails to act

on the taxpayer's protest within one hundred eighty (180) days from date of
submission, by the taxpayer, of the required documents in support of his
protest, the taxpayer may appeal to the Court of Tax Appeals within thirty
(30) days from the lapse of the said 180-day period, otherwise, the
assessment shall become final, executory and demandable.
3.1.6 Administrative Decision on a Disputed Assessment. — The
decision of the Commissioner or his duly authorized representative shall (a)
state the facts, the applicable law, rules and regulations, or jurisprudence on
which such decision is based, otherwise, the decision shall be void (see
illustration in ANNEX C hereof), in which case, the same shall not be
considered a decision on a disputed assessment; and (b) that the same is
his final decision.
3.1.7 Constructive Service. — If the notice to the taxpayer herein
required is served by registered mail, and no response is received from the
taxpayer within the prescribed period from date of the posting thereof in the
mail, the same shall be considered actually or constructively received by the
taxpayer. If the same is personally served on the taxpayer or his duly
authorized representative who, however, refused to acknowledge receipt
thereof, the same shall be constructively served on the taxpayer.
Constructive service thereof shall be considered effected by leaving the
same in the premises of the taxpayer and this fact of constructive service is
attested to, witnessed and signed by at least two (2) revenue o cers other
than the revenue o cer who constructively served the same. The revenue
o cer who constructively served the same shall make a written report of
this matter which shall form part of the docket of this case (see illustration
in ANNEX D hereof).
SECTION 4. Civil Penalties. —
4.1 Twenty-Five Percent (25%) Surcharge. — There shall be imposed,
in addition to the basic tax required to be paid, a penalty equivalent to
twenty-five percent (25%) thereof, in any the following cases:
4.1.1 Failure to le any return and pay the tax due thereon as required under
the provisions of this Code or rules and regulations on the date
prescribed; or
4.1.2 Unless otherwise authorized by the Commissioner, ling a return with
an internal revenue o cer other than those with whom the return is
required to be filed; or
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 4.1.3 Failure to pay the de ciency tax within the time prescribed for its
payment in the notice of assessment; or
4.1.4 Failure to pay the full or part of the amount of tax shown on any return
required to be led under the provisions of this Code or rules and
regulations, or the full amount of tax due for which no return is
required to be led, on or before the date prescribed for its payment.
cdasia

4.2 Fifty Percent (50%) Surcharge:

4.2.1 In case of willful neglect to le the return within the period prescribed
by the Code, or in case a false or fraudulent return is willfully made,
the penalty to be imposed shall be fty percent (50%) of the tax or of
the de ciency tax, in case any payment has been made on the basis of
such return before the discovery of the falsity or fraud: Provided, That
a substantial underdeclaration of taxable sales, receipts or income, or
a substantial overstatement of deductions, as determined by the
Commissioner or his duly authorized representative, shall constitute
prima facie evidence of a false or fraudulent return: Provided, further,
That failure to report sales, receipts or income in an amount
exceeding thirty percent (30%) of that declared per return, and a claim
of deductions in an amount exceeding thirty percent (30%) of actual
deductions, shall render the taxpayer liable for substantial
underdeclaration of sales, receipts or income or for overstatement of
deductions, as mentioned herein: Provided, further, that the term
"willful neglect to le the return within the period prescribed by the
Code" shall not apply in case the taxpayer, without notice from the
Commissioner or his authorized representative, voluntarily les the
said return, in which case, only 25% surcharge shall be imposed for
late ling and late payment of the tax in lieu of the above 50%
surcharge. Conversely, the 50% surcharge shall be imposed in case
the taxpayer les the return only after prior notice in writing from the
Commissioner or his duly authorized representative.
4.2.2 Section 6 (A) of the Code provides that any tax return led by a
taxpayer "may be modi ed, changed or amended " by the taxpayer
"within three (3) years from date of such filing " provided, however, that
"no notice for audit or investigation of such return, statement or
declaration has, in the meantime, been actually served upon the
taxpayer." Thus, if upon investigation, it is determined that the
taxpayer's originally led tax return is false or fraudulent, such
taxpayer shall remain liable to the 50% civil penalty regardless that the
taxpayer has led his amended tax return, if the said amended tax
return, however, has been led only after issuance of the Letter of
Authority for the investigation of the taxpayer's tax return or such
amendment has been made in the course of the said investigation. cda

SECTION 5. Mode of Procedures in Computing for the Tax and/or

Applicable Surcharge. — Shown hereunder are illustrative cases for the
computation and assessment of the tax, inclusive of surcharge (if
applicable) and interest:

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 5.1 Late ling and late payment of the tax . — Illustration: Income tax return
for the calendar year 1998 was due for ling on April 15, 1999 but the taxpayer
voluntarily led his tax return, without notice from the BIR, only on June 30, 1999.
The tax due per return amounts to P100,000. In this case, the taxpayer shall be
liable for delinquency penalties consisting of 25% surcharge, plus 20% interest
per annum, computed from due date of the tax until date of payment, computed
as follows:
Calendar Year 1998
Income tax due per return P100,000.00
Add: 25% surcharge for late filing and late
payment (P100,000.00 times 25%) P25,000.00
20% int. p.a. from 4-15-99 to 6-30-99
(P100,000.00 times .0415524) P4,155.24 P29,155.24
———— —————

Total amount due (excluding suggested compromise for

late filing and late payment of the tax) P129,155.24
=========

Only one 25% surcharge shall be imposed for late ling of the return
and late payment of the tax.
5.2 The tax return is led on time but led through an internal revenue
o cer other than with whom the return is required to be led . — Illustration: The
taxpayer's 1998 income tax return is required to be led through the authorized
agent bank under the jurisdiction of RDO East Makati. But, without prior
authorization from the BIR, the taxpayer led his tax return and paid the tax
through the authorized agent bank under the jurisdiction of RDO Davao City. Tax
due and paid per return is P100,000.00.
Calendar Year 1998
Income tax due per return P100,000.00
Add: 25% surcharge P25,000.00
—————
Total amount due P125,000.00
Less: Amount paid P100,000.00
—————
Amount still due P25,000.00
=========
5.3 Late ling and late payment due to taxpayer's willful neglect . —
Illustration: The taxpayer did not le his income tax return for the calendar year
1997 which was due for ling on April 15, 1998. He was noti ed by the BIR of his
failure to le the tax return, for which reason, he led his tax return and paid the
tax, only after the said notice, on June 30, 1999. The tax due per return is
P100,000.00.
Calendar Year 1997
Income tax due per return P100,000.00
Add: 50% surcharge for willful neglect to
file the return and late payment of the tax
(P100,000 times 50%) P50,000.00
20% int. p.a. fr. 4-15-98 to 6-30-99
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 (P100,000.00 times .2415524) P24,155.24 P74,155.24
————— —————
Total amount due (excluding suggested compromise
for late filing and late payment of the tax) P174,155.24
=========
5.4 Penalty or penalties for de ciency tax . — As a rule, no surcharge is
imposed on de ciency tax and on the basic tax. However, if the amount due
inclusive of penalties is not paid on or before the due date stated on the demand
letter, the corresponding surcharge shall be imposed.
Illustration No. 1: Taxpayer led on time his income tax return for calendar
year 1997 and paid P100,000.00 on April 15, 1998. Upon pre-audit of his return, it
was disclosed that he erroneously computed the tax due. The correct amount of
tax due is P120,000.00. The taxpayer is assessed for de ciency income tax in a
letter of demand and assessment notice issued on June 30, 1999. LLpr

Calendar Year 1997

Tax due per pre-audit P120,000.00
Less: Amount assessed and paid per tax return filed P100,000.00
—————
Deficiency income tax P20,000.00
Add: 20% int. p.a. from 4-15-98 to 6-30-99
(P20,000.00 times .2415524) P4,831.05
—————
Amount still due P24,831.05
=========
Illustration No. 2: ABC CORPORATION led its income tax return for
calendar year 1997 and paid on time its income tax shown thereunder,
amounting to P100,000. Said taxpayer was investigated. Upon veri cation of its
accounting records, it was disclosed that its deduction, from gross income, of
representation expenses in the amount of P200,000.00 did not meet all the
statutory requisites for deductibility. The corporation was duly noti ed of the
said discrepancy through a Preliminary Assessment Notice. Based on the 35%
income tax rate on corporations applicable in the year 1997, the income tax due
after investigation amounts to P170,000.00. After deduction of income tax paid
per return led, the basic de ciency income tax amounts to P70,000, excluding
penalties. Failing to protest on time against the preliminary assessment notice, a
formal letter of demand and assessment notice was issued on May 31, 1999,
requiring payment of the assessment not later than June 30, 1999.
Calendar Year 1997
Income tax due per investigation P170,000.00
Less: Income tax paid per return P100,000.00
—————
Deficiency income tax P70,000.00
Add: 20% int. p.a. fr. 4-15-98 to 6-30-99 (P70,000 times .2415524) P16,908.67
—————
Total amount still due P86,908.67
=========
Illustration No. 3: XYZ CORPORATION led its income tax return for
calendar year 1997 with a net taxable income of P500,000.00. At the applicable
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 income tax rate of 35% for the year 1997, its income tax amounted to
P175,000.00. However, upon investigation, it was disclosed that its income tax
return was false or fraudulent because it did not report a taxable income
amounting to another P500,000.00. On its net income of P1,000,000.00, per
investigation, the income tax due is P350,000.00. Deducting its payment per
return led, the de ciency, excluding penalties, amounted to P175,000.00. It was
duly informed of this nding through a Preliminary Assessment Notice. Failing to
protest on time against the preliminary assessment notice, a formal letter of
demand and assessment notice was issued on May 31, 1999 calling for payment
of the deficiency income tax on or before June 30, 1999. llcd

In this case, said corporation is liable for the civil penalties of 50%
surcharge for having led a false or fraudulent return, plus 20% interest per
annum on the deficiency, computed as follows:
Calendar Year 1997
Income tax due per investigation P350,000.00
Less: Income tax paid per return P175,000.00
—————
Deficiency income tax P175,000.00
Add: 50% surcharge for filing a fraudulent or false
return (P175,000.00 times 50%) P87,500.00
20% int. p.a. fr. 4-15-98 to 6-30-99
(P175,000.00 times .2415524) P42,271.67 P129,771.67
————— —————
Total amount due P304,771.67
=========
5.5 Late payment of a de ciency tax assessed . — In general, the de ciency
tax assessed shall be paid by the taxpayer within the time prescribed in the
notice and demand, otherwise, such taxpayer shall be liable for the civil penalties
incident to late payment.
Illustration: Based on the above Illustration No. 3, Scenario 4, assuming
that the calendar year 1997 de ciency income tax assessment against XYZ
CORPORATION, in the amount of P304,771.67, is not paid by June 30, 1999, the
deadline for payment of the assessment, and assuming further that this
assessment has already become nal and collectible. In this case, such
corporation shall be considered late in payment of the said assessment.
Assuming, further, that the corporation pays its tax assessment only by July 31,
1999, the civil penalties for late payment shall be computed as follows:
Calendar Year 1997
Total deficiency income tax assessed on May 31, 1999 P304,771.67
Add: 25% surcharge for late payment
(P304,771.67 times 25%) P76,192.92
20% interest p.a. from 7-1-99 to
7-31-99 (P304,771.67
times .0166667) P5,079.54 P81,272.46
————— —————
Total amount due (excluding suggested compromise
penalty for late payment) P386,044.13
=========

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 5.6 Computation of 20% interest per annum in case of partial or
installment payment of a tax liability. — Illustration No. 1: In case extended
payment of the tax is duly authorized. — DEF CORPORATION, due to nancial
incapacity, requested that it be allowed to pay its income tax liability per return
for calendar year 1998, in the amount of P1,000,000.00, in four (4) monthly
installments, starting April 15, 1999. Its request has been duly approved
pursuant to Sec. 53 of the Tax Code.
In this case, no 25% surcharge shall be imposed for late payment of the tax
since its deadline for payment has been duly extended. However, 20% interest
per annum for the extended payment shall be imposed, computed based on the
diminishing balance of the "unpaid amount", pursuant to the provisions of Section
249 (D) of the Code.
No 25% surcharge on extended payment shall be imposed provided,
however, that the taxpayer's request for extension of the period within which to
pay is made on or before the deadline prescribed for payment of the tax due.
Conversely, if such request is made after the deadline prescribed for payment,
the taxpayer shall already be treated late in payment, in which case, the 25%
surcharge shall be imposed, even if payment of the delinquency be allowed in
partial amortization.cdasia

Example:
Calendar Year 1998
Income tax due per return P1,000,000.00
Less: 1st installment of the tax on or before 4-15-99 P250,000.00
——————
Balance as of 4-15-99 P750,000.00
Add: 20% int. p.a. from 4-15-99 to 5-15-99
(P750,000.00 times .0166667) P12,500.03
——————
Amount due on 5-15-99 P762,500.03
Less: 2nd installment on 5-15-99 (P250,000.00 plus
P12,500.03 interest) P262,500.03
——————
Balance as of 5-15-99 P500,000.00
Add: 20% int. p.a. from 5-15-99 to 6-15-99
(P500,000.00 times .0166667) P8,333.35
——————
Amount due on 6-15-99 P508,333.35
Less: 3rd installment on 6-15-99 (P250,000.00 plus
P8,333.35 interest) P258,333.35
——————
Balance as of 6-15-99 P250,000.00
Add: 20% int. p.a. from 6-15-99 to 7-15-99
(P250,000.00 times .0166667) P4,166.68
——————
4th and final installment on 7-15-99 P254,166.68
===========
Illustration No. 2: Computation of tax delinquency in case of partial
payment of the tax due without prior BIR authorization for extended payment. —
Example: GHI CORPORATION did not le its nal adjustment income tax
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 return for the calendar year 1998 which was due on April 15, 1999. The BIR
informed the corporation of its failure to le its said tax return and required that
it le the same, inclusive of the 25% surcharge and 20% interest per annum
penalties incident to the said omission. On May 15, 1999 it advised that its
income tax due for the said year amounts to P1,000,000.00 but, however, due to
its adverse nancial condition at the moment, it will be unable to pay the entire
amount, inclusive of the delinquency penalties. Hence, on May 15, 1999, it made a
partial payment of P400,000.00. Assuming that the BIR demanded payment of
the unpaid balance of its tax obligation payable by June 15, 1999, the unpaid
balance of the corporation's delinquent income tax shall be computed as follows:

Calendar Year 1998

Income tax due per return P1,000,000.00
Add: 25% surcharge for late filing and
late payment P250,000.00
20% interest per annum from 4-15-99
to 5-15-99 (P1,000,000.00
times .0166667) P16,666.70 P266,666.70
————— —————
Amount due as of 5-15-99 P1,266,666.70
Less: Partial payment on 5-15-99 P400,000.00
—————
Balance as of 5-15-99 P866,666.70
Add: 20% interest per annum from 5-15-99
to 6-15-99 (P866,666.70 times .0166667) P14,444.47
—————
Amount still due (exclusive of the suggested compromise
penalty for late filing and late payment P811,111.17
=========
If the said taxpayer fails to pay the amount of P811,111.17 by June 15,
1999, no further 25% surcharge for late payment of the tax shall be imposed.
Instead, only the 20% interest per annum shall be imposed against the taxpayer
against the taxpayer, computed from due date thereof (i.e., June 15, 1999) until
paid. If said taxpayer pays the same on partial payment basis, the 20% interest
per annum shall be computed on the diminishing balance thereof, pursuant to the
procedures in the preceding Illustration No. 1, Section 6.6 hereof.
SECTION 6. Suggested Compromise Penalty in Extra-judicial
Settlement of a Taxpayer 's Criminal Violation. — Section 204 of the Tax
Code of 1997 provides that "All criminal violations may be compromised
except: (a) those already led in court , or (b) those involving fraud." This
means that, in general, the taxpayer's criminal liability arising from his
violation of the pertinent provision of the Code may be settled extra-
judicially instead of the BIR instituting against the taxpayer a criminal action
in Court. A compromise in extra-judicial settlement of the taxpayer's criminal
liability for his violation is consensual in character, hence, may not be
imposed on the taxpayer without his consent. Hence, the BIR may only
suggest settlement of the taxpayer's liability through a compromise. prLL

The extra-judicial settlement of the taxpayer's criminal liability and the

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 amount of the suggested compromise penalty shall conform with the
schedule of compromise penalties provided under Revenue Memorandum
Order No. 1-90 or as hereafter revised.
SECTION 7. Repealing Clause. — Any revenue issuance which is
inconsistent herewith shall be considered repealed, amended, or modi ed
accordingly.
SECTION 8 . Effectivity. —
8.1 General Rule. — In general, the provisions of these Regulations shall be
effective beginning January 1, 1998 pursuant to the provisions of
Section 8 of R.A. No. 8424, otherwise known as the National Internal
Revenue Code of 1997.
8.2 Computation of Surcharge and Interest on De ciency Tax Assessment .
— Any de ciency tax assessment issued beginning January 1, 1998
shall be governed by the rules prescribed in these Regulations. cda

8.3 Other Provisions. — Any provision of these Regulations not otherwise

speci cally provided in the National Internal Revenue Code of 1997
shall take effect fteen (15) days after publication in any newspaper
of general circulation.

(SGD.) EDGARDO B. ESPIRITU

Secretary of Finance

Recommending Approval:

(SGD.) BEETHOVEN L. RUALO

Commissioner of Internal Revenue

ANNEX A
Preliminary Assessment Notice

ABC Corporation
123 Makati Avenue
Makati City
TIN: 000-000-000-000

Gentlemen:
Please be informed that after investigation there has been found due from
you deficiency income tax for calendar year 1997, as shown hereunder:

Assessment No. _______

Taxable income per return P1,000,000.00
Add: Discrepancies per investigation

1. Undeclared rental income P200,000.00

2. Non-deductible interest expenses 300,000.00
3. Undocumented representation expenses 150,000.00
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 4. Non-deductible bad debt expense 250,000.00 900,000.00
————— —————
Taxable income per investigation P1,900,000.00
—————
Income tax due thereon (35%) P665,000.00
Less: Income tax paid per return 350,000.00
—————
Balance P315,000.00
Add: 50% surcharge for filing of fraudulent return P157,500.00
20% interest per annum from 4-15-96 to 3-15-98 63,000.00 220,500.00*
—————
TOTAL AMOUNT DUE P535,500.00*
*Please note that the interest and the total amount due will have to be adjusted if paid beyond 3-15-
98

The complete details covering the aforementioned discrepancies

established during the investigation of this case are shown in the accompanying
ANNEX A-1 of this letter of demand. cdasia

The 50% surcharge has been imposed pursuant to the provisions of

Section 248(B) of the National Internal Revenue Code, as amended by R.A. No.
8424, which took effect on January 1, 1998, in view of your failure to report for
income tax purposes your aforementioned rental income. Such omission renders
your income tax return led for the taxable calendar year 1997 as a false or
fraudulent return.

The 20% interest per annum has been imposed pursuant to the provisions
of Section 249(B) of the said Code.
Pursuant to the provisions of Section 228 of the National Internal Revenue
Code of 1997 and its implementing Revenue Regulations, you are hereby given
the opportunity to present in writing your side of the case within fteen (15) days
from receipt hereof. If we fail to hear from you within the said period, you shall be
considered in default, in which case, a formal letter of demand and assessment
notice shall be issued by this O ce calling for payment of your aforesaid
deficiency income tax, inclusive of the aforementioned civil penalty and interest.
We hope that you will give this matter your preferential attention.

Very truly yours,

ANNEX A-1

ABC CORPORATION
123 Makati Avenue
Makati City
TIN: 000-000-000-000
DETAILS OF DISCREPANCIES

Assessment No. ________

1. Undeclared rental income (P200,000.00) . — Veri cation disclosed that

you derived this rental income from the lease of your building to XYZ
CORPORATION during the tax year 1997 but the same, without any legal
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 justi cation, was neither recorded in your books of accounts nor declared in your
income tax return, thereby resulting to the understatement of your reported
taxable income for the said tax year.

2. Non-deductible interest expense (P300,000.00) . — Veri cation disclosed

that this interest expense, claimed as deduction from your gross income for the
tax year 1997, was actually incurred in connection with your loan from Mr. JUAN
CASTRO. It was, however, further disclosed that Mr. Castro owns and controls
60% of your outstanding capital stock. Hence, this interest expense is not a valid
deduction from your gross income, pursuant to Section 34(B)(2), in relation to
Section 36(B)(2) of the National Internal Revenue Code which provides that no
deduction shall be allowed in respect of interest expense incurred between an
individual and a corporation more than fty percent (50%) in value of the
outstanding stock of which is owned, directly or indirectly, by or for such
individual. LexLib

3. Undocumented representation expenses (P50,000.00) . — Veri cation

disclosed that this item of deduction from your gross income for the tax year
1997 is in fact unsubstantiated with any documentary evidence, hence,
disallowed in audit.
4. Non-deductible bad debt expense (P250,000.00) . — Veri cation
disclosed that this item of deduction from your gross income for the tax year
1997 was, in fact, a mere provision for estimated uncollectible accounts from
your customers as of the end of the said year. Under Section 34(E) of the said
Code, a mere provision for estimated uncollectible accounts is not allowable
deduction from gross income. In general, for bad debts to be deductible, the
following statutory requisites must have been complied with:

4.1 That, the debts due from your debtor or debtors must have been
ascertained actually worthless as of the end of the taxable year; and
4.2 That, the same have been actually charged or written-off in your books
of accounts as of the end of the said taxable year.
4.3 That, the said accounts receivable have actually been charged off or
written-off the books of accounts as of the end of the taxable year.
The records of this case disclosed that you have not introduced any
evidence to overthrow the validity of our said findings.

It is requested that your aforesaid de ciency income tax liability be paid

immediately upon receipt hereof, inclusive of penalties incident to delinquency.
This is our nal decision. If you disagree, you may appeal this nal decision with
the Court of Tax Appeals within thirty (30) days from date of receipt hereof,
otherwise our said de ciency income tax assessment shall become nal,
executory and demandable.

Very truly yours,

ANNEX B
FORMAL LETTER OF DEMAND

ABC Corporation
123 Makati Avenue
Makati City
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 TIN: 000-000-000-000

Gentlemen:

Please be informed that after investigation there has been found due
from you deficiency income tax for calendar year 1997, as shown hereunder:
Assessment No. _______
Taxable income per return P1,000,000.00
Add: Discrepancies per investigation
1. Undeclared rental income P200,000.00
2. Non-deductible interest expenses 300,000.00
3. Undocumented representation expenses 150,000.00
4. Non-deductible bad debt expense 250,000.00 900,000.00
————— —————
Taxable income per investigation P1,900,000.00
—————
Income tax due thereon (35%) P665,000.00
Less: Income tax paid per return 350,000.00
—————
Balance P315,000.00
Add: 50% surcharge for filing of fraudulent return P157,500.00
20% interest per annum from 4-15-96 to 3-15-
63,000.00 220,500.00*
98
—————
TOTAL AMOUNT DUE P535,500.00*
*Please note that the interest and the total amount due will have to be adjusted if paid beyond 3-15-
98

The complete details covering the aforementioned discrepancies

established during the investigation of this case are shown in the accompanying
SCHEDULE 1 of this letter of demand.
The 50% surcharge has been imposed pursuant to the provisions of
Section 248(B) of the National Internal Revenue Code, as amended by R.A. No.
8424, which took effect on January 1, 1998, in view of your failure to report for
income tax purposes your aforementioned rental income. Such omission renders
your income tax return led for the taxable calendar year 1997 as a false or
fraudulent return. cdll

The 20% interest per annum has been imposed pursuant to the provisions
of Section 249(B) of the said Code.

In view thereof, you are requested to pay your aforesaid de ciency income
tax liability through the duly authorized agent bank in which you are enrolled
within the time shown in the enclosed assessment notice.

Very truly yours,

ANNEX C

ABC Corporation
123 Makati Avenue
Makati City
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 TIN: 000-000-000-000

FINAL DECISION ON DISPUTED ASSESSMENT

Gentlemen:
Referring to your letter dated May 15, 1999, please be informed that your protest
against our calendar year 1997 de ciency income tax assessment in the amount of
P535,500.00, the subject matter of our covering letter of demand dated March 15, 1999, is
hereby denied for lack of factual and legal basis. The aforesaid assessment is premised on
the following:
1. Undeclared rental income (P200,000.00). — Veri cation disclosed that you
derived income from the lease of your building to XYZ Corporation during
the year 1997 but this was not recorded in your books of accounts and
also not reported in your income tax return.
2. Non-deductible interest expense deduction (P300,000.00). — Veri cation
disclosed that this interest expenses was incurred in connection with your
loan from MR. JUAN CASTRO. It was also disclosed that Mr. Castro owns
60% of the outstanding stock of ABC Corporation. Hence the said interest
expense is non-deductible in computing ABC Corporation's taxable income
pursuant to Section 34(B)(2)(a), in relation to Section 36(B)(2) of the NIRC,
that interest paid on a loan transaction between an individual and a
corporation more than fty percent (50%) in value of the outstanding stock
of which is owned, directly or indirectly, by or for such individual shall be
deductible from gross income for income tax purposes. cdasia

3. Undocumented representation expenses (P150,000.00). — Veri cation

disclosed that the veracity of this item of deduction has not been
established, hence, disallowed as a deduction from gross income.
4. Non-deductible bad debt expense (P250,000.00). — Veri cation disclosed that
this was a mere provision for estimated collectible accounts as of the end
of the year 1997. Under Section 34(E), NIRC, a mere provision for estimated
uncollectible accounts is not deductible from gross income. To be
deductible, two requisites must be met:
4.1 That, the debts due from your debtor/s (accounts receivable) have
been ascertained actually worthless as of the end of the taxable
year; and
4.2 That, the said accounts receivable have actually been charged off or
written-off the books of accounts as of the end of the taxable year.
The records of this case disclosed that you have not introduced any evidence to
overthrow the validity of our said findings. dctai

It is requested that your aforesaid de ciency income tax liability be paid immediately
upon receipt hereof, inclusive of penalties incident to delinquency. This is our nal decision. If
you disagree, you may appeal this nal decision with the Court of Tax Appeals within thirty
(30) days from date of receipt hereof, otherwise our said de ciency income tax assessment
shall become final, executory and demandable.
Very truly yours,

ANNEX D

CONSTRUCTIVE SERVICE OF NOTICE/S

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 MEMORANDUM FOR:
The Commissioner/Regional Director
Thru Channel

SUBJECT :

Name of Taxpayer: __________________

Address: __________________
T.I.N.: __________________
Kind of Taxes: __________________
Amount: P_________________
This is to report that I/We personally served on the subject taxpayer at the above given
address on ______________, 1999, the formal letter of demand and assessment notice, dated
_______________, 1999, calling for payment of his/its above stated tax liability. However, the
taxpayer refused to acknowledge receipt thereof. I/We also tried to serve the same on
___________________________________, the taxpayer's duly authorized representative, but the
latter likewise refused to acknowledge receipt thereof.
Due to the foregoing, the said formal letter of demand and assessment notice were
constructively delivered by leaving the same conspicuously at the taxpayer's residence/place
of business at _____________________, on ____________, 1999.

_______________________
Revenue Officer

_________________________ _________________________
Name and Signature of Witness Name and Signature of Witness

_________________________ _________________________
Designation Designation

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