Understanding compromise and abatement of taxes
More than once, a client has approached our office with the problem where the Bureau
of Internal Revenue (BIR) is collecting from them taxes which they are hesitant or, worse,
unable to pay.
Clients would then ask us to convey to the BIR that their business has been losing money
for years, and make a request to lower or cancel the assessment of taxes.
This would involve compromise and abatement of taxes, so let’s examine the difference
between compromise and abatement.
Let us first review the case of Lepanto Consolidated Mining Co. vs. Commissioner
of Internal Revenue which was decided by the Court of Tax Appeals (CTA) in 2019 (CTA EB
The taxpayer, Lepanto Consolidated, filed two applications for the abatement of
surcharge and compromise penalties with the BIR in the amount of P4,627,009.37 and
P5,603,219.34 on the ground that the company had been losing money for the past two years.
Both applications relied on Revenue Regulations (RR) No. 13-2001 issued by the BIR for its
claim for abatement.
The BIR denied Lepanto’s application on the ground of lack of legal basis, and
demanded that Lepanto pay P10,230,248.71 — which the company did pay,
under protest. The company also filed a petition for review with the CTA, seeking a ruling
that abatement of taxes was proper.
The CTA denied the petition and declared that RR 13-2001, which provides that
continuous and heavy losses incurred by the taxpayer for the last two years as grounds for
abatement or cancellation of the penalties and interest, as being unjust or excessive, does not
conform to the standards set by Section 204 of the Tax Code.
Continuous heavy losses incurred by the taxpayer for the last two years cannot be
treated as falling under the category of a tax being “unjustly” assessed. Moreover, the CTA
declared there was no showing that there was a rational connection between being “unjustly”
assessed of a tax and sustaining “continuous heavy losses” regardless of the duration thereof.
Lepanto also did not prove that compared to other taxpayers, it was not accorded the same
treatment as that of other taxpayers in the issuance of the tax assessment. Neither was it
established that there was a dispute as to the correctness of such assessment.
So what is a compromise and how is it different from abatement of taxes?
A compromise under the Tax Code is the remedy that may be resorted to when there
is (i) a reasonable doubt as to the validity of the claim against the taxpayer, or (ii) the financial
position of the taxpayer demonstrates a clear inability to pay the tax.
Notably, in compromises grounded on the financial incapacity to pay, a minimum
compromise rate equivalent to 10 percent of the basic assessed tax shall be paid. For
other cases, a minimum compromise rate equivalent to 40 percent of the basic
assessed tax is payable.
On the other hand, abatement of taxes is the remedy that may be resorted to when (i)
the tax or any portion thereof appears to be unjustly or excessively assessed, or (ii) The
administration and collection costs involved do not justify the collection of the amount due.
Criminal violations that are already filed in court and those involving fraud may not be
the subject of a compromise. (Section 204 of the NIRC).
The BIR has outlined grounds for considering compromises on tax payments in its Revenue
Regulations 30-2022 and 8-2003 as follows.
A. Doubtful validity of the assessment
(a) The delinquent account or disputed assessment is one resulting from a jeopardy
assessment which is one issued without the benefit of complete or partial audit by an
authorized revenue officer
(b) The assessment seems to be arbitrary in nature and lacks legal or factual basis
(c) The taxpayer failed to file an administrative protest due to failure to receive notice of
assessment and there is reason to believe that the assessment is lacking in legal or
(d) The taxpayer failed to file a request for reinvestigation/ reconsideration or to
elevate to the CTA an adverse decision of the BIR within time from receipt of
final assessment notice and there is reason to believe that the assessment is lacking
in legal or factual basis
(g) The assessment is based on the “Best Evidence Obtainable Rule” and there is
reason to believe that the same can be disputed by sufficient and competent evidence
(h) The assessment was issued within the prescriptive period for assessment as
extended by the taxpayer’s execution of Waiver of the Statute of Limitations
where the issuance of the waiver is being questioned
(i) There is an adverse decision against the BIR on the Assessment but for which the
Supreme Court has not decided upon with finality
B. Financial incapacity
(a) The corporation ceased operation or is already dissolved
(b) The taxpayer is suffering from surplus or earnings deficit resulting to
impairment in the original capital by at least 50%
(c) The taxpayer is suffering from a net worth deficit, provided that in the case of an
individual taxpayer, he has no other leviable properties under the law other than his
(d) The taxpayer is a compensation income earner with no other source of income
and the family’s gross monthly compensation income does not exceed the levels of
compensation income provided for under Regulations, and it appears that the taxpayer
possesses no other leviable or distrainable assets, other than his family home
(e) The taxpayer has been declared by any competent tribunal/authority/body/government
agency as bankrupt or insolvent
Compromises are discretionary upon the BIR and are approved based on existing facts
and circumstances. No offer of compromise are entertained unless the taxpayer waives in
writing the secrecy of bank deposits.
On the other hand, there are two grounds for abatement of taxes as follow:
(1) The tax or any portion thereof appears to be unjustly or excessively assessed
(2) The administration and collection of costs involved do not justify the collection of the
amount of due
The word “unjust” means deficient in justice and fairness such as when the taxpayer was
not given the same treatment as other taxpayers in the assessment process.
Whereas, the term “excessive” means greater than what is usual and proper, exhibiting
excess and greater than usual amount or degree such that when the tax assessment is over
and above the tax imposition made under the law. (Lepanto Consolidated Mining Co. vs.
Commissioner of Internal Revenue)
Some grounds for abatement of taxes, penalties and interest are filing and payment
made in the wrong venue, mistake in payment, assessment due to non-compliance brought
about by difficult interpretation of the law, and failure of the taxpayer to file the return and make
payment due to circumstances beyond its control but only in relation to surcharge and compromise
penalty but not interest, and other meritorious circumstances.
To end, compromises and abatement are subject to the evaluation and approval of the
(The author, Atty. John Philip C. Siao, is a practicing lawyer and founding Partner of Tiongco
Siao Bello & Associates Law Offices, teaches law at the MLQU School of Law, and an Arbitrator
of the Construction Industry Arbitration Commission of the Philippines. He may be contacted
at email@example.com. The views expressed in this article belong to the author alone.)
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