The Supreme Court has upheld the validity of the compromise settlement between the Bureau of Internal Revenue and electric utility provider Korea Electric Power Philippines Corporation over its tax deficiencies amounting to more than P300 million for year 2006.
However, the SC exhorted the government should exercise its power of taxation fairly and uniformly “to maintain the general public’s trust and confidence in the government.”
In a 13-page decision penned by Associate Justice Mario Lopez, the SC’s First Division denied the opposition of the Office of the Solicitor General, which served as the counsel for the BIR when the tax case was being litigated before the Court of Tax Appeals.
In seeking to invalidate the tax deal between BIR and Kepco, the OSG argued that the compromise agreement is not valid because it failed to prove any of the grounds for a valid compromise under Revenue Regulations No. 30-2002, otherwise known as the “Basis for Acceptance of Compromise Settlement.”
The chief state lawyer said the BIR arrogated unto himself the power of the National Evaluation Board to decide on the offer of compromise when the bureau accepted Kepco’s additional payment of P16.6 million before the NEB could approve or reject Kepco’s original application for compromise agreement.
The OSG also manifested before the high court that it is entitled to collect a five percent success fee in case of government approved compromise agreement.
But the chief state lawyer asked the high tribunal to order Kepco to pay the balance of P343.24 million plus additional interest, fees, or surcharges as a consequence of its void compromise settlement with the BIR, and that the OSG be awarded the sum of P17.1 million or five percent of the P343.24 million.
The SC disagreed and upheld that the compromise agreement for deficiency taxes is well-within the power of the BIR as stated in Section 204 (A) of the 11997 National Internal Revenue Code.
“The CIR (Commissioner of Internal Revenue) may compromise an assessment when a reasonable doubt as to the validity of the claim against the taxpayer exists, or the financial position of the taxpayer demonstrates a clear inability to pay the tax,” the SC decision stated.
The high court said that the Court cannot interfere with the discretionary functions of the CIR without proof of grave abuse of discretion.
“Here, no grave abuse of discretion exists, Kepco complied with the procedures prescribed under the BIR rules on the application and approval of compromise settlement on the ground of doubtful validity,” the SC ruled.
Kepco has maintained that there exists a doubtful validity on the assessment for the taxable year 2006 which prompted the CIR to consider and accept Kepco’s compromise offer.
The SC said Kepco already paid 100 percent of the basic deficiency value-added tax and 40 percent of the basic deficiency final withholding tax (FWT) for 2006 in the amount of P134.19.
The CIR approved the compromise settlement as early as December 11, 2017.
“Thus, to allow the OSG to question the validity of the compromise settlement alleging anomalies in its approval is not only unfair to Kepco and taxpayers alike that entered into compromise agreements in good faith but there will also be no final and definitive settlement of tax compromises,” the SC pointed out.
While taxes are considered the lifeblood of the government, the SC reminded it that the power of taxation should be “exercised with caution to minimize proprietary rights of a taxpayer.”
“To maintain the general public’s trust and confidence in the government this power must be used justly and not treacherously,” the SC stressed.
Nonetheless, the high court agreed that the OSG is entitled to five percent total deficiency taxes paid by Kepco.
In line with this, the SC directed the BIR to remit five percent of the total compromise amount paid by Kepco to the OSG and declared the case closed and terminated.