Tax Controversy 2023

Last Updated May 18, 2023


Law and Practice


SyCip Salazar Hernandez & Gatmaitan is a full-service law firm and one of the largest in the Philippines. The firm’s tax department consists of 34 lawyers (14 partners, one of counsel, one special counsel and 18 associates), a half of whom are certified public accountants, and is headed by Ms Carina C. Laforteza, who is a partner and a certified public accountant. SyCipLaw’s tax department provides the entire range of tax services, from advising on, and structuring, the tax aspects of corporate transactions to administrative and judicial litigation in relation to tax refunds and defending clients against assessments for national and local taxes and customs duties, including in respect of safeguarding measures cases before the Department of Trade and Industry and the Tariff Commission. The firm also assists its corporate clients in obtaining rulings and with compliance requirements.

The Philippines practises self-assessment, wherein the taxpayer determines the tax liability, files the tax returns and pays the taxes due. Proper tax administration, however, cannot rely on voluntary compliance alone. Thus, several measures are in place to facilitate the taxpayer’s compliance with the tax laws, such as the extensive investigatory powers granted to tax authorities. To check the correctness of taxes remitted to the government, tax authorities are authorised to examine the taxpayer’s returns and related documents.

Tax controversies in the Philippines are generally the result of regular tax audits/investigations conducted by: 

  • the Bureau of Internal Revenue (BIR) for national taxes under the National Internal Revenue Code of 1997, as amended (Tax Code); 
  • the Bureau of Customs (BOC) for tariff and customs duties; and 
  • local government units (LGUs) for local taxes, which include local business taxes and real property taxes (RPT). 

A tax controversy arises when the authorities issue an assessment for tax deficiencies and the taxpayer disputes that assessment. 

Tax controversies may also arise from the following:

  • premature issuance of warrants that authorise the BIR to attach the taxpayer’s real and personal properties, even if the tax assessment is not yet final;
  • assessments for customs duties and taxes arising from the tariff classification and valuation of imported products;
  • claims for refund by the taxpayer involving erroneously or illegally collected taxes, excess creditable taxes withheld, and excess unutilised input taxes;
  • requests for a ruling on the tax implications of a certain transaction (eg, tax treaty relief applications and requests for tax-free exchange rulings);
  • court decisions, which finally resolve and confirm the taxability of certain transactions – these may lead to tax audits of taxpayers with similar transactions, or of those belonging to the same industry or industries where such transactions are common;
  • complaints, confidential information filed by informers, or referrals from other government agencies, which may result in the investigation and prosecution of criminal tax cases under the BIR’s Run After Tax Evaders (RATE) programme; and
  • petitions filed by taxpayers to assail the validity of a tax statute, local tax ordinance of LGUs or regulations issued by the BIR or BOC.

For national taxes, most tax controversies involve corporate income tax, withholding tax and value-added tax (VAT). This is due mainly to the taxpayer’s poor tax compliance system and inadequate documentation or lack of supporting records. Deficiency assessments on corporate income tax usually come from conflicting interpretations of law or tax regulations or differing tax positions on a complex transaction. Withholding tax deficiencies are commonly due to differences of opinion on the applicable withholding tax rates and discrepancies over the amount of certain expenses reported in the financial statements (FS) or tax returns as against the alphabetical list of income payees (which contains the amounts paid to these payees and the taxes withheld). VAT controversies normally arise from non-compliance with the proper invoicing requirements for VAT zero-rated sales.

For local taxes, the typical tax controversy involves RPT, where there is a dispute over the property classification and assessment level. Some LGUs also continue to impose local taxes on export-oriented companies and other companies entitled to tax incentives. 

A controversy involving national taxes is mitigated by securing a confirmatory ruling from the BIR regarding the tax implications of a transaction.

Other ways to mitigate tax controversies include: 

  • seeking tax advice or opinion on a transaction, especially when it involves a novel tax issue, difficult interpretation of tax laws or conflicting positions due to its complexity; 
  • engaging an external adviser to conduct tax due diligence; and 
  • maintaining a robust tax compliance system.

The Philippines has not fully adopted the Organisation for Economic Co-operation and Development (OECD)’s Base Erosion and Profit Shifting (BEPS) Recommendations, nor the European Union (EU)’s recent measures to combat tax avoidance. 

When the BIR assesses a taxpayer for tax deficiencies, it will issue a final assessment notice/formal letter of demand (FAN/FLD), requiring the taxpayer to pay the assessed taxes within 30 days from the date of demand. If the taxpayer agrees, it can immediately pay the assessed taxes. However, if the taxpayer disagrees with the assessment, the taxpayer must file a protest within 30 days from receipt of the demand. The protest must contain the taxpayer’s factual and legal bases for disputing the tax assessment, together with supporting documents. The taxpayer is not required to pay the amount of deficient taxes due while the tax assessment is under protest. However, interest on the tax deficiency tax will continue to accumulate until the full amount of tax is paid.

Generally, the CIR’s decision or inaction on the protest may be elevated to the Court of Tax Appeals (CTA) without payment of the disputed tax. Nonetheless, the BIR may still enforce collection against the taxpayer, unless collection is suspended by the CTA.

The rule is different in the case of RPT (a local tax) because the taxpayer must pay the RPT due before filing a protest. 

Under the Customs Modernisation and Tariff Act (CMTA), the BOC shall assess the duties and taxes on imported goods. If the importer disputes the assessment, such shall be completed upon either final readjustment based on the tariff ruling in the case of a classification dispute, or final resolution of the protest case involving valuation, rules of origin, and other customs issues. In the absence of fraud and when the goods have been finally assessed and released, the assessment shall be conclusive three years from the date of final payment of duties and taxes, or upon completion of the post-clearance audit. Decisions of the BOC Commissioner may be appealed to the CTA.

Revenue Memorandum Order (RMO) 19-2015, as amended by RMO 64-2016, prescribes the procedures to be observed during a tax audit. It classifies those that are subject to tax audits as follows: 

  • mandatory cases including claims for tax refund, tax clearance and estate tax returns; 
  • priority taxpayers/industries such as taxpayers with zero-rated sales, taxpayers enjoying tax exemptions/incentives and those whose compliance is below the established benchmark rate; and 
  • other priority audits identified by the BIR.

RMO 19-2015 also provides that taxpayers who have not been audited but have been in operation for more than three years are subject to a mandatory tax audit. Meanwhile, those that have been subject to a tax audit for two successive taxable years will no longer be subject to tax audit, unless there is a presumption of a tax fraud (ie, understatement of sales/income, or overstatement of expenses/deductions by at least 30%).

Under the Tax Code, the BIR has the authority to assess internal revenue taxes within three years after the last day prescribed by law for the filing of the return or the actual date of filing, whichever is later. In exceptional cases (ie, false/fraudulent return with intent to evade tax or failure to file a return), the BIR may assess the taxpayer at any time within ten years after discovery of the falsity, fraud or omission.

While the law does not limit the duration of the tax audit, as long as it is conducted within the three-year prescriptive period, RMO 19-2015 requires the BIR examiners to strictly comply with the prescribed periods for completion of their audits. BIR examiners are given an internal deadline of 180 days (for non-large taxpayers) or 240 days (for large taxpayers) from the issuance of the letter of authority (LOA) to submit their report.

Generally, tax audits do not suspend the prescriptive period except for the following instances:

  • when the BIR is prohibited from making the assessment and for 60 days thereafter; 
  • when the taxpayer requests a reinvestigation which is granted by the CIR; 
  • when the taxpayer cannot be located at the address given in the tax return filed, upon which a tax is being assessed/collected; and 
  • when the taxpayer is out of the Philippines. 

The prescriptive period is also suspended when the taxpayer agrees, in writing, to waive such period.

Meanwhile, the BOC may conduct an audit examination, inspection, verification, and investigation of records pertaining to any goods declaration for the purpose of ascertaining the correctness of that goods declaration and determining the liability of the importer for duties, taxes and other charges, including any fine or penalty, within three years from the final payment date of duties and taxes or customs clearance. 

Generally, tax audits are conducted in the business premises of the taxpayer during business hours. The BIR examiners usually request copies of tax returns, invoices and official receipts, journal vouchers, ledgers and other accounting books and records. Tax returns, invoices and official receipts are based on printed documents, while books of accounts and accounting records can be made available electronically or in a spreadsheet format.

Tax auditors should check the authority of the assigned BIR examiners and the validity of the LOA issued to the taxpayer. A taxpayer may validly refuse a request for examination by any revenue officer not mentioned in the LOA. Tax auditors must ensure that the BIR examiners’ power to conduct the tax audit has not lapsed or does not go beyond the scope of the LOA.

The BIR typically examines the completeness and timeliness of a taxpayer’s filings; furthermore, it is likely that the BIR will compare the FS, tax returns and other documents to spot discrepancies between the amounts reported/disclosed (eg, sales in the FS as opposed to sales reported in the alphabetical list). The discrepancies noted will become the basis of any tax deficiency assessment.

The prevalence of rules concerning cross-border exchanges of information and mutual assistance between tax authorities has contributed to an increase, though not a significant one yet, in tax audits in the Philippines.

Republic Act No 10021 (the Exchange of Information on Tax Matters Act) allows the exchange of information by the BIR on tax matters according to internationally agreed tax standards. Under the law, the CIR is authorised to inquire into the taxpayer’s bank deposits and other related information held by financial institutions, and to respond to a request from a foreign tax authority, pursuant to a tax treaty to which the Philippines is a party. Furthermore, income tax returns of the taxpayer subject of an exchange of information request shall be open to inspection, upon the order of the President of the Philippines.

We have not experienced, or are not aware of, any joint tax audits conducted by the BIR with the tax authority of another state.

Familiarity With the Tax Treatments of Accounts and Transactions

Taxpayers should be familiar with the tax treatment of all their material accounts, entries and transactions. It would be helpful if these tax treatments were documented through company policies or supported by the opinion of a tax expert.

Prepare Tax Documents and Other Supporting Documents in Advance

In tax audits, the tax authorities will request all relevant tax returns, accounting records and other documents. Since the BIR usually requests the same set of documents, the taxpayer can prepare the documents for a given year in anticipation of a tax audit. Having complete documents not only gives the impression that the taxpayer is prima facie compliant with all its tax filings and reporting obligations, but also facilitates the conduct of the audit. It is also helpful if the taxpayer can provide a reconciliation of the usual discrepancies the BIR examiners note in their findings. Accordingly, the taxpayer can easily explain the reason for any discrepancies thereby preventing the discrepancy from giving rise to a deficiency assessment.

Designate a Contact Person for the Tax Authorities

To ensure a smooth audit, the taxpayer should designate a responsible employee to co-ordinate with the tax authorities on their document requests and to handle the overall conduct of the tax audit.

Engage an External Tax Adviser

It is prudent to engage an external tax adviser to handle the tax audit who can help prepare the factual and legal arguments and ensure that the rights of the taxpayer are adequately protected. An external adviser may also be consulted on major legal issues and possible questions from the tax examiner during the audit. 

When attempting to refute or protest an assessment by the tax authorities, the administrative phase is mandatory and must be concluded before proceeding to the judicial phase.

Letter of Authority (LOA)

The issuance of an LOA signifies the start of a tax assessment. The LOA is issued to authorise a BIR examiner to conduct a tax audit. It must specify the type of taxes that will be examined and the taxable year subject of the audit. 

Tax Audit Proper

After the issuance of the LOA, the BIR examiners can request and examine the tax returns, books of accounts and accounting records, official receipts, invoices, and other relevant documents necessary for the tax audit. 

Notice of Discrepancy (NOD)

Upon audit, the BIR examiners will submit their initial report containing findings of discrepancies. Based on the report, the taxpayer shall be informed in writing of the discrepancies for the discussion of discrepancy (Discussion). 

The taxpayer may present its side and explain the discrepancy during the Discussion, which must not extend beyond 30 days from receipt of the NOD. The taxpayer must also submit all the necessary supporting documents within the 30-day period. Failure by the taxpayer to appear without prior notice is tantamount to a waiver of its right to a Discussion. If the taxpayer does not agree with the BIR’s findings, or if the BIR finds that the taxpayer is still liable for tax deficiencies, the case will be endorsed for issuance of a PAN within ten days from the conclusion of the Discussion.

Preliminary Assessment Notice (PAN)

The PAN contains the proposed deficiency tax assessment along with its factual and legal bases. The taxpayer may file a reply to the PAN within 15 days from receipt, containing the taxpayer’s factual and legal bases in disputing the PAN, and supporting documents.

Final Assessment Notice and Formal Letter of Demand (FAN/FLD)

The BIR will review the taxpayer’s reply to the PAN. If the BIR does not accept the taxpayer’s explanation, it will issue the FAN/FLD, which must be done within the three-year prescriptive period, and in exceptional cases, within ten years. Otherwise, the BIR’s right to assess will be barred by prescription. Usually, the FAN/FLD is only a reiteration of the findings in the PAN with adjustments on the amount of interest.

If the taxpayer does not agree with the BIR’s findings, it must file a protest within 30 days from receipt of the FAN/FLD. A protest may be in the form of a request for reconsideration or for reinvestigation. In case of a request for reinvestigation, the taxpayer must submit additional supporting documents within 60 days from the date of filing of the protest. If the taxpayer does not file a protest, the assessment becomes final and executory. 

Final Decision on Disputed Assessment (FDDA)

Based on the arguments in the protest and the supporting documents, the BIR will decide whether to grant or deny (in whole or in part) the protest, which decision will be embodied in an FDDA. The taxpayer may appeal the FDDA administratively through a motion for reconsideration before the CIR, or judicially through an appeal before the CTA.

Administrative Claim Phase in BOC

Depending on the issue involved (eg, refund, abandonment, valuation rules or origin issues), decisions of the Port Office, or of the BOC Commissioner, may be appealed administratively and/or judicially within the corresponding period prescribed under the CMTA and its implementing rules.

There is no mandatory deadline given to tax authorities to decide a protest lodged by a taxpayer.

For national taxes, the CIR is given 180 days from receipt or, in case of a request for reinvestigation, from receipt of the supporting documents to decide on the protest. If a decision is received during this period, the taxpayer has 30 days from receipt of the BIR’s decision within which to appeal to the CTA.

However, in the case of CIR’s inaction, the taxpayer has the option to file an appeal before the CTA within 30 days from the lapse of the 180-day period or to wait for the CIR’s decision and then appeal it within 30 days from receipt of that decision.

Different periods are provided in the case of refunds of national taxes and protests against, and refunds of, local taxes.

Judicial tax litigation is initiated by filing a petition for review (petition) with the CTA to appeal:

  • the CIR’s decision or inaction on disputed assessments involving national internal revenue taxes; 
  • the BOC Commissioner’s decision in cases involving liability for customs duties; or
  • the Central Board of Assessment Appeals (CBAA)’s decision in the exercise of its appellate jurisdiction over cases involving the RPT assessments originally decided by the provincial or city board of assessment appeals. 

Judicial tax litigation may also be initiated by filing a complaint before the regional trial courts (RTC) in respect of local taxes originally decided by the local treasurer of the respective LGUs.

The CTA adopted certain provisions under the 2019 Amendments to the 1997 Rules of Civil Procedure, pursuant to CTA En Banc Resolution 9-2020. Other provisions that were not specifically adopted shall apply supplementarily. 

After the filing of a petition and payment of docket fees, summons will be served to the respondent (eg, BIR), requiring it to file an answer within 30 calendar days after service of the summons, which period may be extended for another 30 days. The answer must include all of the claims/defences, legal bases, and grounds for dismissal of the petition (if any). 

After the BIR files an answer, the case will be set for pre-trial not later than 60 days from the filing of the last responsive pleading. The parties must submit their respective pre-trial briefs at least three calendar days before the pre-trial.

During the pre-trial conference (PTC), the parties, through counsel, may stipulate on facts, determine the issues to be resolved and identify the evidence to be presented during trial. After the PTC, the CTA will issue a pre-trial order reciting the matters covered during the PTC. The order shall bind the parties, limit the trial to matters not disposed of and control the course of the trial, unless modified by the CTA to prevent injustice. 

Thereafter, trial hearings will be conducted by the CTA for the presentation of the parties’ respective evidence. Upon completion, the CTA will direct the parties to file their respective memoranda, which summarise the parties’ claims, arguments and defences. The CTA Division will decide on the issues based on the evidence presented during trial.

Testimonial and documentary evidence are important considering that judicial claims before the CTA are litigated de novo and decided based on what has been presented and formally offered by the parties (and admitted by the CTA) during the trial. 

The documents or exhibits to be presented, their purpose, and the numbers and names of witnesses, are identified as early as during the PTC. However, testamentary and documentary evidence will still need to be presented and marked before the CTA during the course of the trial hearings. 

The testimonies of the witnesses will be presented pursuant to the Judicial Affidavit Rule. The judicial affidavit contains the testimony of the witness in a question-and-answer format and is submitted in lieu of the direct testimony of the witness.

Under the CTA En Banc Resolution 9-2020, the taxpayer must submit all its evidence (eg, judicial affidavits and documentary evidence) upon filing of the Petition with the CTA. This is a significant change from the previous practice, wherein evidence was submitted only during the course of the PTC. Nevertheless, the CTA sometimes allows parties to introduce evidence that was not submitted together with the Petition, if a judicial affidavit (JA) containing the testimony of the witness and attaching the documentary evidence cited in the JA is submitted at least five days before the PTC.

Tax assessments are presumed to be correct and made in good faith. Thus, in order to overturn this presumption and avoid a decision in favour of the tax authority, the taxpayer must prove that the assessment has no legal or factual basis. Similarly, the claimant must prove all the elements required for a tax refund since refunds are construed strictly against the claimant and in favour of the state. In criminal tax litigation, the government is required to prove the accused’s guilt beyond reasonable doubt. 

Timing to Produce Documents

Under the revised rules of the CTA, all pieces of evidence, including the judicial affidavits of witnesses, must be submitted upon filing of the petition or answer with the CTA. 


In cases where the dispute involves mostly factual issues, it is important for the taxpayer to determine, as early as possible, the quantity and quality of evidence that is available or that can be produced to support its position. Note that judicial claims are decided based on what has been presented and formally offered by the parties during the trial, and while the allegations by the taxpayer may be factually correct, mere allegations without proof cannot be given weight by the courts, unless they can be subject to judicial notice.

Legal Arguments

Tax disputes normally arise from conflicting interpretations of a legal provision. Thus, it is critical for the taxpayer and its tax adviser, who may or may not be the litigating lawyer, to conduct comprehensive research to determine the probability of obtaining a favourable ruling.

Possibility of Settlement

The CTA rules provide for referral to mediation and entering into a compromise agreement if both parties are willing to settle the case out of court. The taxpayer, in determining whether to settle, must evaluate not only the strength of its arguments, but also practical considerations such as litigation costs, duration of court proceedings, potential benefit it may gain should the case be decided in its favour and whether an early settlement outweighs all the costs already incurred.

Expert Reports

A party who desires to introduce voluminous documents/long accounts into evidence must, with the CTA’s prior approval, refer the voluminous documents to an independent Certified Public Accountant who will review, as a court-appointed commissioner, the source documents or other financial records, and render a summary report. 

It is also possible to obtain testimony from an expert on certain issues that have an impact on the tax treatment.

Court decisions are based primarily on tax laws and regulations. Judicial decisions applying or interpreting the laws form a part of the legal system of the Philippines. However, only decisions of the Supreme Court establish jurisprudence and are binding on all other courts. Nonetheless, since the Tax Code originated in US tax law, older decisions of US courts in tax cases are, although not binding, persuasive. 

In cases where there is no established precedent, or where the case involves international tax issues, the local courts may find foreign jurisprudence and international guidelines (eg, OECD guidelines) persuasive in the interpretation of tax treaties and in the resolution of the tax issue at hand. However, these foreign authorities, while persuasive, are not binding on local courts.

The judicial phase of tax litigation consists of several levels of review. 

A taxpayer may seek judicial relief if its protest was denied, whether fully or partially, by the CIR. Upon issuance of the FDDA, the taxpayer may opt to appeal administratively to the CIR or to elevate its appeal to the CTA, through filing a Petition. 

The CTA is a highly specialised court that reviews cases involving tax issues. There are two levels of review at the CTA: CTA Divisions and CTA En Banc.

The appealed decision of the CIR will be tried and resolved by the CTA Division. In the case of an unfavourable ruling, the taxpayer may file a motion for reconsideration (MR) or a motion for new trial (MNT) before the same CTA Division. The resolution of the CTA Division on the MR or MNT may be appealed through a Petition with the CTA En Banc. Lastly, the decision of the CTA En Banc may be appealed to the Supreme Court through a petition for review on certiorari.

For local taxes originally decided by the local treasurer of the respective LGUs, an appeal of the local treasurer’s decision may be made through filing a complaint before the RTC having jurisdiction over the taxpayer’s place of business.

Cases involving RPT go through the Local Board of Assessment Appeals and the CBAA before they are appealed to the CTA En Banc.

Petition for Review (CTA Division)

For cases under CTA’s exclusive appellate jurisdiction, such as CIR’s decision involving disputed assessments, the taxpayer files an appeal by filing a petition before the CTA. The Petition must be filed within 30 days from receipt of the FDDA or CIR’s denial of the taxpayer’s MR. In cases where a taxpayer elevates the FDDA to the CIR by filing an MR, it is crucial to determine whether subsequent actions by the BIR will be viewed as a denial of the MR. In a recent case, the Supreme Court clarified that the Preliminary Collection Letter, the Final Notice Before Seizure, the Warrant of Distraint and/or Levy issued while the administrative appeal is pending are not final decisions on the appeal to the CIR and the taxpayer may opt to wait for the CIR’s decision.

The CTA Division will then hear and resolve the case based on the issues presented and evidence submitted by the parties. 

Motion for Reconsideration or New Trial (CTA Division)

Once a decision is promulgated, an aggrieved party may file an MR or MNT before the same CTA Division. Otherwise, the decision of the CTA Division becomes final and executory.

The CTA Division may grant or deny, whether fully or partially, the MR or MNT based on the merits and the arguments of the parties.

Petition for Review (CTA En Banc)

The CTA Division’s resolution on the MR or MNT may be appealed by filing a Petition with the CTA En Banc within 15 days from receipt of the resolution. Otherwise, the resolution of the CTA Division becomes final and executory.

The CTA En Banc may sustain, reverse or modify the CTA Division’s decision. The aggrieved party may file an MR before the CTA En Banc within 15 days from receipt of the adverse decision. If no MR is filed before the CTA En Banc, the decision shall become final and executory.

Petition for Review on Certiorari (Supreme Court)

The aggrieved party may appeal the decision of the CTA En Banc to the Supreme Court by filing a petition for review on certiorari within 30 days from receipt of the decision. The aggrieved party may file an MR of the decision before the Supreme Court within 15 days from receipt of the adverse decision. Upon finality of the decision by the Supreme Court, the tax assessment becomes final and executory.

Court of Tax Appeals

The CTA is composed of a Presiding Justice and eight Associate Justices appointed by the President of the Philippines. The CTA may sit En Banc, or in three divisions comprised of three justices each, including the Presiding Justice, who shall be the Chairman of the First Division.

Cases in divisions are heard and decided upon by three CTA justices sitting as one body. The affirmative votes of at least two CTA justices are required for the rendition of a decision/resolution.

Cases in CTA En Banc are decided by the eight Associate Justices and the Presiding Justice sitting as one body. The affirmative votes of at least five justices shall be necessary for the rendition of a decision/resolution. If a majority vote is not reached, the petition or motion shall be dismissed or denied. 

Supreme Court

The Philippine Supreme Court is composed of a Chief Justice and 14 Associate Justices, who are appointed by the President of the Philippines. The Supreme Court may sit En Banc or in one of its three divisions composed of five members each.

Under the CTA guidelines, the CTA may refer cases to mediation. However, not all cases may be referred to mediation (eg, criminal tax cases and those cases where there is already a final and executory decision).

The parties will be required to appear before a mediator to determine their willingness to enter into mediation. If one party objects, the mediation proceedings will be terminated and the CTA proceedings will continue.

If both parties are willing to enter into mediation, they will be asked to execute an agreement to mediate and proceed with mediation. The parties have 30 days, extendible for another 30 days, to reach a compromise agreement. A successful mediation may result in either a full compromise, which would terminate the CTA proceedings, or a partial compromise, wherein CTA proceedings on the remaining issues would continue.

Mediation allows the party and the BIR to enter into a settlement which may entail a reduction of the amount of tax assessed, including any surcharge, interest and penalties. In mediation, the BIR is still bound by substantive law, particularly Section 204 of the Tax Code, which provides for a compromise settlement of 40% or 10% of the basic tax assessed based on doubtful validity of the assessment or financial incapacity, respectively. In the latter case, the taxpayer is required to prove its financial incapacity through supporting facts and documents. A settlement offer less than the prescribed minimum rates would still be subject to the approval of the evaluation board composed of the CIR and the four deputy commissioners.

Aside from court-annexed mediation, the BIR assessment may be settled by administrative compromise/abatement. Under the Tax Code, the CIR may compromise over tax payments when:

  • reasonable doubt exists as to the validity of the claim against the taxpayer; or
  • the taxpayer’s financial position demonstrates a clear inability to pay the assessed tax.

In cases of financial incapacity, the minimum compromise rate is equivalent to 10% of the basic assessed tax, while for all other cases, the minimum compromise rate is 40%.

The CIR may also abate or cancel the entire amount or portion of unpaid tax liability if the assessment is excessive or if the administration costs involved are not justified by the collection of the amount due.

A revocation, modification or reversal of a BIR ruling shall not be given retroactive application if it will prejudice the taxpayer. In this sense, confirmatory tax rulings issued by the tax authority are binding against the BIR, but only in relation to the taxpayer who originally applied for that ruling, the specific transaction involved, and the taxes that were the subject of the ruling. Moreover, since the ruling is issued by the BIR based on facts represented by the taxpayer, if the BIR subsequently finds that the facts represented are different from the actual ones, the ruling will be considered void and will not be binding against the BIR.

In addition to the details discussed in 6.2 Settlement of Tax Disputes by Means of ADR, the following cases cannot be referred to mediation:

  • where the jurisdiction of the CTA, BIR, BOC, Secretary of Finance, Secretary of Trade and Industry, or Secretary of Agriculture is in issue;
  • where there is a pending application for a temporary restraining order or preliminary injunction for the suspension of collection of taxes;
  • cases arising from criminal offences within the jurisdiction of the CTA Division or En Banc;
  • the RTC’s decisions/resolutions/orders in tax collection cases involving final and executory assessments;
  • the RTC’s decisions/resolutions/orders in local tax cases;
  • the CBAA’s decisions over cases involving the assessment and taxation of real property; and
  • civil cases involving tax assessments that are final and executory.

The BIR has not yet strictly implemented the transfer pricing (TP) audit guidelines during a tax audit. 

The TP regulations provide that the BIR and the taxpayer may enter into an advance pricing agreement (APA) to determine in advance an appropriate set of criteria for the determination of the transfer prices of controlled transactions over a fixed period. The APA aims to reduce the risk of TP examination and double taxation. However, the APA is not mandatory and is undertaken purely on a voluntary basis on the part of the taxpayer. As of writing, the BIR has not yet issued separate guidelines on the application of APAs.

Failure to pay the correct taxes will not only result in an assessment for basic deficiency taxes but also in the imposition of civil penalties. Civil penalties include a 25% surcharge (50% in cases of wilful neglect to file the return or where a false or fraudulent is wilfully made) and interest on the unpaid amount of tax at the rate of double the legal interest rate. 

Non-payment of taxes does not automatically give rise to a criminal offence, unless the circumstances of non-payment (eg, it is attended by fraud) constitute a separate criminal offence. 

When a criminal action is instituted, the civil action for collection of taxes is automatically instituted in that criminal action. However, an assessment is not necessary before a criminal case may be instituted, and a collection/assessment case does not automatically mean that a tax offence has been committed.

Based on the findings in a regular tax audit, third-party information or other sources, a taxpayer may be the subject of a preliminary investigation for violation of the Tax Code before the Department of Justice (DOJ), which is the initial step in a criminal tax case. 

Pursuant to the RATE programme, which is a joint programme of the BIR and DOJ, the BIR is mandated to investigate criminal violations of the Tax Code and assist in the prosecution of criminal cases.

Criminal tax cases are initially filed with the DOJ for determination of the existence of probable cause in a preliminary investigation. Upon a finding of the existence of probable cause, the case will be filed either at the RTC or the CTA, depending on the amount involved.

The RTC has original jurisdiction over criminal offences arising from violations of the Tax Code and other laws administered by the BIR or BOC, where the principal amount of taxes and fees claimed, exclusive of charges and penalties, is less than PHP1million (approximately USD20,000) or where there is no specified amount claimed. The CTA has original jurisdiction over criminal tax cases when the amount claimed is at least PHP1million.

Upfront payment of the additional tax assessment does not result in the reduction of potential fines applicable to the tax offence. Furthermore, the payment of the tax due shall not constitute a valid defence in any prosecution for violations of the Tax Code.

Payment of the assessed tax does not prevent or stop a criminal tax trial. Criminal cases already filed in court and those involving tax fraud may not be compromised. 

During the administrative phase of the tax assessment, compromise penalties are imposed and collected by the BIR against the taxpayer, in lieu of criminal prosecution for violations committed by the taxpayer (see 6.3 Agreements to Reduce Tax Assessments, Interest or Penalties). However, certain violations, such as tax evasion and declarations under penalties of perjury, may not be compromised.

Rule 9 of the CTA rules sets out the following procedures for appeals.

Notice of Appeal

An appeal to the CTA En Banc in criminal cases decided by the RTC in the exercise of its original jurisdiction shall be made by filing a notice of appeal within 15 days from receipt of a copy of the decision or final order with the court which rendered the final judgment or order appealed from and by serving a copy upon the adverse party. 

Petition for Review

An appeal to the CTA En Banc in criminal cases decided by the CTA Division shall be taken by filing a petition within 15 days from receipt of the decision or resolution appealed from. The CTA may, for good cause, extend the time for filing of the Petition for an additional period not exceeding 15 days.

An appeal to the CTA En Banc in criminal cases decided by the RTC in the exercise of their appellate jurisdiction shall be taken by filing a petition within 15 days from receipt of the decision/final order appealed from. 

Petition for Review on Certiorari

An appeal to the Supreme Court in criminal cases decided by the CTA En Banc shall be made by filing a petition for review on certiorari within 15 days from receipt of the decision or resolution appealed from. The Supreme Court may, for justifiable reasons, grant an extension of 30 days within which to file the petition.

Neither a general anti-abuse rule (GAAR) nor a specific anti-avoidance rule (SAAR) has been adopted in the Philippines.

In one case wherein the BIR imputed interest on an interest-free loan, the Supreme Court ruled that the BIR’s power to allocate gross income does not include the power to impute “theoretical interest” because there must be actual or, at the very least, probable receipt or realisation by the taxpayer of the income that is being allocated. The Supreme Court also recognised that interest cannot be imposed unless expressly stipulated in writing.

Currently, the Philippines still adheres to the distinction between tax evasion and tax avoidance with the latter generally being considered to be acceptable. However, there are specific rules in the Tax Code which seek to prevent tax avoidance practices, such as the substantial change of ownership in connection with net operating loss carryover and limitation on interest expenses. Furthermore, Section 50 of the Tax Code allows the CIR to allocate income and deductions between controlled entities.

If the BIR has assessed additional taxes in a cross-border transaction resulting in double taxation, taxpayers typically resort to domestic litigation (as opposed to availing of the mechanisms under the double tax treaty) to appeal the administrative decision.

The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) has not been adopted in the Philippines. As of date, the Philippines has double taxation agreements (DTA) with 43 countries. None of these have an arbitration clause, relying, instead, on a mutual agreement procedure (MAP), which is a means through which tax administrations of contracting parties consult to resolve disputes regarding the application of double tax conventions. This procedure can be used to eliminate double taxation that could arise from a TP adjustment.

RR 10-2022 prescribed the guidelines and procedures to be followed by taxpayers in requesting for MAP assistance from the CIR, which is the Philippine-designated competent authority. The rulings and MAP section of the International Tax Affairs Division (ITAD) shall commence the analysis and resolution of MAP cases. However, a taxpayer may, prior to making a formal request for MAP assistance, request for a pre-filing consultation following the procedures outlined in the said regulation. To request for MAP assistance, a taxpayer must submit a request in writing, which must be signed by the taxpayer or its/his/her authorised representative. 

Neither a GAAR nor a SAAR has been adopted in the Philippines. Moreover, the Philippines has not yet signed nor ratified the MLI. 

The lack of uniform regulations in TP adjustments poses a challenge to both taxpayers and tax authorities in addressing international TP issues. Consequently, the decisions of tax authorities are made on a case-by-case basis. Although the BIR has not yet issued detailed APA regulations, an APA would be expected to address disputes on TP concerns. 

As of this writing, international TP adjustments have not been challenged before local tax courts, although there are local tax cases in the CTA wherein TP has been raised as an issue or TP principles/guidelines have been used by the BIR as a tool to make tax assessments against taxpayers.

The TP regulations provide for an APA, which a taxpayer may enter into on a voluntary basis in order to reduce the risk of a TP audit and double taxation. The APA may be either unilateral or bilateral/multilateral.

As of this writing, however, the BIR has yet to issue detailed APA guidelines.

Withholding taxes and permanent establishment are common issues relating to cross-border transactions. Another common issue is the documentary stamp tax implications of transactions that have both local and international elements (eg, an offshore loan contract with a security agreement that has onshore property as collateral, and vice versa). 

We anticipate that TP and taxation of the digital economy will be major sources of tax controversies involving cross-border transactions in the coming years.

No information is available in this jurisdiction.

No information is available in this jurisdiction.

No information is available in this jurisdiction.

No information is available in this jurisdiction.

The MLI has not been adopted in the Philippines. The Philippines’ DTAs do not provide an arbitration clause but only a MAP (see 8.1 Mechanisms to Deal With Double Taxation).

Existing DTAs in the Philippines make use of the MAP to resolve matters arising from double taxation. However, these DTAs do not specifically provide a procedure for arbitration and those matters which can be subject to arbitration. Moreover, the MLI has not been adopted in the Philippines. 

Generally, a taxpayer who believes that they have been subject to double taxation may raise their concerns with BIR, through ITAD, to resolve the conflict. According to the DTAs, the BIR should endeavour to resolve the case by mutual agreement with the competent authority of the other contracting state, to avoid taxation which is not in accordance with the DTA. 

Tax Treaty Relief Applications

RMO 14-2021, as clarified by Revenue Memorandum Circular (RMC) 77-2021, provides the documentary requirements and procedures for tax treaty relief applications (TTRAs). Under these issuances, all income items derived by non-residents entitled to tax treaty relief shall be confirmed by the BIR through the filing of (i) a request for confirmation (RFC) by the withholding agent when the treaty rate for a certain income payment has been used/applied as the withholding tax rate, or (ii) a TTRA by the non-resident taxpayer together with an application for refund of excess taxes withheld, if the regular withholding tax rate is applied. 

Issuance of a Certificate of Entitlement to Treaty Benefit (COE) for approved TTRAs and RFCs, instead of a BIR Ruling, was likewise introduced in the foregoing issuances. 

RMC 20-2022 clarified that taxpayers who were already issued with COE – where the tenor thereof allows the ruling to be applied to subsequent or future income payments – shall no longer file an RFC or TTRA every time an income of similar nature is paid to the same non-resident. In applying the confirmed treaty benefit to future income payments, the income payor/withholding agent shall always be guided by the requisites mentioned in the COE. 

The BIR has also issued RMO 46-2020, which requires the filing of a request for a confirmatory ruling for a taxpayer to avail itself of the 15% reduced rate under the tax sparing provision of the Tax Code. 

Neither baseball arbitration nor the independent opinion procedure is specifically adopted in the Philippines. The rules on arbitration which, in general, prevail in the Philippines require that a fair and reasonable award be rendered by the arbitrator.

The OECD countries have taken measures to broaden the modes of settling disputes, including international tax arbitration. 

The Philippines has not yet adopted the MLI which provides for a tax arbitration procedure. Thus, the MAP laid down in the DTAs and relevant issuances of the tax authorities are the main instruments used in the Philippines. 

While the Philippines has been making significant progress in its readiness to join the Inclusive Framework on BEPS, it has not yet fully adopted the same. Thus, it is not anticipated that BEPS Pillars One and Two will take effect in the jurisdiction. 

The Philippine Congress has proposed several bills to address the tax challenges stemming from the digitalisation of the economy and to impose taxes on certain digital transactions; however, as of this writing, none of these bills have been enacted into law.

Under the DTAs, a taxpayer may present their case or tax imposition, which is not in accordance with the DTA, to the competent authority (ie, the BIR) of the said state of which they are a resident. Rulings of the BIR on issues of international tax raised by a certain taxpayer are published on its official website for guidance to other taxpayers. Although not binding on courts, BIR rulings may be given persuasive effect by domestic courts. 

In settling international tax disputes, reference to the DTAs signed by the Philippines must be made. These DTAs provide for a MAP where the contracting states may engage into discussions on the issue of double taxation. They may communicate directly with each other for the purpose of reaching an agreement and to discuss special cases not provided for in the DTAs. 

Independent professionals or lawyers can be hired by either the taxpayer or the state to initiate international arbitration. As in the recent Malampaya tax arbitration dispute (see 10.4 Implementation of the EU Directive on Arbitration), in which SPEX hired an independent law firm to pursue its case. 

There is no filing fee for tax cases at the administrative level. 

The filing fee for instituting a case before the CTA Division is between 0.67% and 1.5% of the amount of the disputed assessment, plus other nominal fees.

These fees are collected from the taxpayer upon filing of a petition which cannot be refunded, regardless of the outcome of the case. Nominal fees will also be paid upon the filing of an appeal with the CTA En Banc and the Supreme Court.

There are also filing fees for tax-related cases filed before other courts or agencies such as the RTC and the CBAA. These filing fees are paid upon the filing of the case.

Payment of filing fees are mandatory and jurisdictional.

The filing fees to litigate before the CTA, and other costs incurred in connection with the tax litigation (professional/attorney’s fees, out of pocket expenses, etc) are for the taxpayer’s own account, and considered as sunk costs that cannot be recovered/reimbursed.

The mediation fee consists of a basic mediation fee in the amount of PHP2,500 (approximately USD50) and an additional mediation fee of PHP5,000-PHP50,000 (approximately USD100-USD1,000), depending on the sum in dispute.

There is currently no available data on the number of cases that are pending before the CTA. 

The latest available annual report containing the statistics on case disposition was published in 2016, which provides that the CTA attained a disposal rate (ratio of case output over case input) of 23% and a clearance rate (ratio of case output over cases filed) of 72%.

There is no readily available data regarding the number of cases initiated and terminated every year relating to different taxes.

In tax criminal cases, the CTA has published statistics regarding the number of cases initiated and resolved every year. The latest report in 2018 provides that out of the 38 criminal tax cases initiated and filed before the CTA, only seven cases were decided/resolved during the same year.

There is currently no available data regarding which party succeeds in litigation. 

According to latest available annual report published in 2016, the CTA awarded a total of PHP28.9 billion in favour of the litigants.

Cost-Benefit Analysis

The taxpayer must evaluate whether pursuing a certain remedy would actually be more beneficial than simply paying. 

Filing an appeal entails costs, including filing fees, professional/legal fees, out-of-pocket expenses and other incidental fees. These costs are over and above the potential tax liabilities that the taxpayer may pay if the decision turns out to be unfavourable. Furthermore, interest on tax deficiencies continues to run while the case is pending (unlike in tax refund cases wherein the government is not obliged to pay interest if the taxpayer is entitled to a refund). Therefore, if the taxpayer loses, it can end up with a hefty tax bill. Aside from monetary costs, court litigation also involves time and effort.


In general, when seeking judicial relief, it will take years before the case can be resolved with finality. If the taxpayer does not obtain a favourable judgment, the interest on the deficient taxes continues to accumulate while the case is pending. This goes together with the cost-benefit analysis to be conducted by the taxpayer in deciding which course of action to pursue.

It is generally better to settle the deficient taxes at the audit stage if the claim is indefensible or, even if it is defensible, if the cost of litigation exceeds the proposed assessment.

Strength of the Case

During the course of the tax audit, and before seeking judicial relief, the taxpayer must evaluate the legal and factual bases of its case. The taxpayer must not only provide legal arguments, it should also be able to substantiate these arguments with facts based on documents or the testimonies of witnesses. While the taxpayer’s position may be legally sound and correct, there is always a risk that the taxpayer may lose the case for failure to present sufficient evidence to warrant a favourable ruling. 

Possibility of Settlement

The taxpayer may also wish to consider exploring settlement. A mediation and compromise settlement may sometimes be a win-win situation for both parties, not only financially, but also regarding the speedy disposition and termination of the case.

SyCip Salazar Hernandez & Gatmaitan

SyCipLaw Center
105 Paseo de Roxas
Makati City 1226
Metro Manila

+632 8982 3500

+632 8817 3570
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Law and Practice


SyCip Salazar Hernandez & Gatmaitan is a full-service law firm and one of the largest in the Philippines. The firm’s tax department consists of 34 lawyers (14 partners, one of counsel, one special counsel and 18 associates), a half of whom are certified public accountants, and is headed by Ms Carina C. Laforteza, who is a partner and a certified public accountant. SyCipLaw’s tax department provides the entire range of tax services, from advising on, and structuring, the tax aspects of corporate transactions to administrative and judicial litigation in relation to tax refunds and defending clients against assessments for national and local taxes and customs duties, including in respect of safeguarding measures cases before the Department of Trade and Industry and the Tariff Commission. The firm also assists its corporate clients in obtaining rulings and with compliance requirements.

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