Legal basis and superseding rules
- The Regulations are promulgated pursuant to Section 244 of the National Internal Revenue Code of 1997 (Code).
- The Regulations implement the compromise provisions under Sections 7(c), 204(A) and 290 of the National Internal Revenue Code of 1997.
- Revenue Regulations Nos. 6-2000 and 7-2001 are superseded.
- All other inconsistent issuances are amended, modified, or repealed accordingly (Section 8).
Policy and objective of compromises
- The Regulations are issued to implement Sections 7(c), 204(A) and 290 of the Code.
- The Regulations expressly recognize and operationalize the authority of the Commissioner of Internal Revenue to compromise payment of internal revenue tax liabilities.
- Compromise is structured for certain taxpayers with outstanding receivable accounts and disputed assessments before the Bureau of Internal Revenue and the courts (Section 1).
Coverage: cases that may be compromised
- A compromise settlement is available for covered cases if the taxpayer complies with the basis requirements under Section 3 (Section 2).
- The following cases may be the subject of compromise settlement:
- Delinquent accounts.
- Administrative protest cases after issuance of a Final Assessment Notice that remain 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 disputed before the courts.
- Collection cases filed in courts.
- Criminal violations, other than those already filed in court or those involving criminal tax fraud (Section 2).
- The following are exceptions where compromise is not entertained under the stated rule:
- Withholding tax cases, unless the applicant invokes provisions casting doubt on the taxpayer’s obligation to withhold.
- Criminal tax fraud cases confirmed as such by the Commissioner of Internal Revenue or the Commissioner’s duly authorized representative.
- Criminal violations already filed in court.
- Delinquent accounts with a duly approved schedule of installment payments.
- Cases where final reports of reinvestigation or reconsideration were issued resulting in reduction of the original assessment, and the taxpayer is agreeable by signing the required agreement form for that purpose.
- Other protested cases are handled case-by-case by the Regional Evaluation Board (REB) or the National Evaluation Board (NEB).
- Cases that become final and executory after final judgment of a court, where compromise is requested on the ground of doubtful validity of the assessment.
- Estate tax cases where compromise is requested on the ground of financial incapacity of the taxpayer (Section 2).
Grounds for acceptance of compromise
- The Commissioner may compromise the payment of any internal revenue tax on two principal grounds:
- Doubtful validity of the assessment (Section 3.1).
- Financial incapacity (Section 3.2).
- Under doubtful validity, an offer on reasonable doubt as to validity may be accepted when any of the following is shown:
- The assessment results from a jeopardy assessment, meaning a tax assessment made without the benefit of complete or partial audit by an authorized revenue officer, where the officer has reason to believe collection will be jeopardized by delay because of the taxpayer’s failure to comply with audit/investigation requirements to present books/records and/or substantiate deductions, exemptions, or credits.
- The assessment appears arbitrary, based on presumptions, with reason to believe it lacks legal and/or factual basis.
- The taxpayer failed to file an administrative protest due to alleged failure to receive notice of assessment, with reason to believe the assessment lacks legal and/or factual basis.
- The taxpayer failed to request reinvestigation/reconsideration within 30 days from receipt of the Final Assessment Notice, with reason to believe the assessment lacks legal and/or factual basis.
- The taxpayer failed to elevate an adverse decision of the Commissioner or authorized representative to the Court of Tax Appeals (CTA) within 30 days from receipt thereof, with reason to believe the assessment lacks 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 under Section 228 of the Code.
- The assessments are based on the “Best Evidence Obtainable Rule,” with reason to believe the assessment can be disputed by sufficient and competent evidence.
- The assessment was issued within the prescriptive period extended by the taxpayer’s execution of a Waiver of the Statute of Limitations, where the validity or authenticity of the waiver is questioned, and there is strong reason and evidence to prove it is not authentic (Section 3.1).
- Under financial incapacity, an offer may be accepted upon showing any of the following:
- The corporation ceased operation or is already dissolved; however, tax liabilities corresponding to the Subscription Receivable or Assets distributed/distributable to stockholders representing return of capital at the time of cessation/dissolution are not considered for compromise.
- The taxpayer’s latest Balance Sheet shows surplus or earnings deficit resulting in impairment of original capital by at least 50%, subject to the rules that amounts payable or due to stockholders other than business-related transactions properly includible in regular “accounts payable” are treated by fiction of law as part of capital, and the taxpayer has no sufficient liquid asset to satisfy the tax liability.
- The taxpayer has networth deficit (total liabilities exceed total assets) computed by deducting total liabilities (net of deferred credits and amounts payable to stockholders/owners reflected as liabilities, except business-related transactions) from total assets (net of prepaid expenses, deferred charges, pre-operating expenses, and appraisal increases in fixed assets) from the latest audited financial statements; in the case of an individual, the individual has no other leviable properties under the law other than the family home.
- The taxpayer is a compensation income earner with no other source of income and family gross monthly compensation income does not exceed the levels of compensation income provided for under Section 4.1.1 of these Regulations, and the taxpayer possesses no other leviable or distrainable assets other than the family home.
- The taxpayer has been declared bankrupt or insolvent by any competent tribunal/authority/body/government agency (Section 3.2).
- The Commissioner shall not consider an offer for compromise based on financial incapacity when any of the following exist:
- The taxpayer has a Tax Credit Certificate (TCC) issued under the National Internal Revenue Code of 1997 or Executive Order No. 226 that is on hand or in transit.
- The taxpayer has a pending claim for tax refund or tax credit with the Bureau of Internal Revenue, the Department of Finance One-Stop-Shop Tax Credit and Duty Drawback Center (Tax Revenue Group or Investment Incentive Group), and/or the courts.
- There is an existing finalized agreement or a prospect of a future agreement that resulted or could result in increased equity of the taxpayer at the time of the offer or at a definite future time (Section 3.2).
- No offer of compromise is entertained unless and until the taxpayer waives in writing the privilege of the secrecy of bank deposits under Republic Act No. 1405 or other general or special laws.
- The waiver authorizes the Commissioner to inquire into the taxpayer’s bank deposits (Section 3.2).
- If circumstances place the taxpayer-applicant’s inability to pay in serious doubt, the Commissioner may deny the application based on financial incapacity (Section 3.2).
Minimum compromise percentages and computation
- Compromise settlements are subject to minimum rates reckoned on a per tax type assessment basis, based on the basic assessed tax (Section 4).
- For cases of financial incapacity, minimum compromise rates are:
- 10% when the taxpayer is an individual whose only source of income is employment and:
- If single: monthly salary is P10,500 or less, including allowances.
- If married: combined salary with the spouse is P21,000 per month or less, including allowances.
- It appears the taxpayer possesses no other leviable/distrainable assets other than the family home.
- 10% when the taxpayer is an individual with no source of income.
- 10% when the taxpayer has:
- Zero networth computed under Section 3.2(c).
- Negative networth computed under Section 3.2(c).
- A dissolved corporation.
- 20% when the taxpayer is an already non-operating company for a period of less than 3 years as of the date of application; 10% when the non-operating period is three (3) years or more as of the date of application.
- 40% when surplus or earnings deficit results in impairment of original capital by at least 50%.
- 20% when declared insolvent or bankrupt, unless the taxpayer falls squarely under the situations applying the appropriate rate; the rules require the “appropriate rate” to be applied within these categories (Section 4.1).
- 10% when the taxpayer is an individual whose only source of income is employment and:
- For cases of doubtful validity, the minimum compromise rate is 40% of the basic assessed tax (Section 4.2).
- A taxpayer may request a compromise rate lower than 40% for doubtful validity, but the request must be:
- Submitted in writing stating the reasons (legal and/or factual) why the taxpayer should be entitled to the lower rate.
- Submitted for approval by the NEB for offers lower than the minimum 40% (Section 4.2).
- The prescribed minimum percentages also apply to compromise settlements of assessments consisting solely of increments (surcharge, interest, etc.) based on the total amount assessed (Section 4).
Required documents for filing
- For a compromise application based on Section 4.1.1, the taxpayer must submit:
- A certification from the employer on prevailing monthly salary, including allowances.
- A sworn statement that the taxpayer has no other source of income other than from employment (Section 5.1).
- For a compromise application based on Section 4.1.2, the taxpayer must submit a sworn statement that the taxpayer derives no income from any source whatever (Section 5.2).
- For a compromise application based on Section 4.1.3, the taxpayer must submit:
- A copy of the latest audited financial statements or audited Account Information Form filed with the BIR.
- For Section 4.1.3.3 (dissolved corporations): the Notice of Dissolution submitted to the SEC or an equivalent document.
- For Section 4.1.3.6 (bankruptcy/insolvency): a copy of the order declaring bankruptcy or insolvency (Section 5.3).
- For offers based on financial incapacity, the taxpayer must submit:
- A Waiver of the Secrecy of Bank Deposit under R.A. 1405.
- A sworn statement stating the taxpayer has no Tax Credit Certificate (TCC) on hand or in transit and no pending claim for tax refund or TCC under the National Internal Revenue Code of 1997 and Executive Order No. 226 in any office (Section 5).
- Additional requirements under existing Revenue Memorandum Orders must still be complied with unless amended or expanded by an amendatory Revenue Memorandum Order (Section 5).
Approval, boards, and payment options
- Except where approval is delegated to the REB, all compromise settlements within the National Office (NO) require approval by:
- A majority of all the members of the NEB, composed of the Commissioner and the four (4) Deputy Commissioners (Section 6).
- Decisions of the NEB granting the request or favorable to the taxpayer have the effect that the Commissioner is bound by the NEB outcome (Section 6).
- Offers of compromise of assessments issued by Regional Offices involving:
- Basic deficiency taxes of P500,000 or less, and
- Minor criminal violations discovered by the Regional and District Offices,
are subject to approval by the REB.
- The REB is composed of the following Regional Officers:
- Regional Director as Chairman.
- Assistant Regional Director.
- Chief, Legal Division.
- Chief, Assessment Division.
- Chief, Collection Division.
- Revenue District Officer having jurisdiction over the taxpayer-applicant (Section 6).
- If the compromise offer is less than the prescribed rates under Section 4, approval is always subject to the NEB (Section 6).
- The taxpayer may pay the compromise offer before or after approval by the board (NEB or REB) at the taxpayer’s option (Section 6).
- If the compromise offer previously paid is disapproved, the matter is handled under the prevailing procedures in the relevant Revenue Memorandum Order, including its amendments (Section 6).
Mandatory congressional reporting
- The Commissioner must submit to the Congressional Oversight Committee through the Chairmen of the Committee on Ways and Means of both the Senate and House of Representatives a report on the exercise of powers to compromise tax liabilities.
- The report is due every six (6) months of each calendar year (Section 7).
- The REB must submit to the Commissioner all necessary reports and data in due time to enable the Commissioner to submit the required congressional reports (Section 7).
Effect of repeal and separability
- Revenue Regulations No. 6-2000 and Revenue Regulations No. 7-2001 are superseded (Section 8).
- All inconsistent issuances are amended, modified, or repealed accordingly (Section 8).